BusinessBanking & Finance

Surge in yuan holdings by banks prompts concern in Seoul

Three Chinese banks are being inspected against backdrop of higher risk from declining currency

PUBLISHED : Thursday, 20 March, 2014, 1:35am
UPDATED : Thursday, 20 March, 2014, 1:35am

South Korean authorities are inspecting units of four foreign banks over a spike in yuan holdings, regulatory sources said yesterday, reflecting Seoul's concern about potential risks posed by the rapid rise in exposure to China's markets and its currency.

Yuan holdings by South Korean residents soared to an equivalent of US$7.62 billion at the end of last month, up from US$310 million six months earlier, as mainland banks aggressively raise funds overseas in response to tighter credit back home.

Because the won cannot be directly converted into yuan, the deposits are built through a structured product using dollar-won and dollar-yuan swaps.

The total amount is still much too small to pose any systemic threat to South Korea's US$1.1 trillion economy, but given its past episodes of financial turbulence, the authorities are highly sensitive to rapid changes in cross-border flows.

Losses are likely if this decline [in the yuan] becomes a trend

"The inspection was initiated due to concerns that the sharp increase in yuan deposits could lead to an increase in external debt as well as risk of losses for depositors stemming from increased credit risk in China," one source said, adding that it would take time for the regulators to assess the impact of yuan deposit growth. "This inspection doesn't mean that some measure on suppressing yuan deposits is on our minds. This is about fact-finding," he said.

Officials have in the past expressed their concern about potential losses for South Korean investors if their deposits are used to fund risky loans on the mainland that subsequently go sour.

The four banks being inspected were Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Barclays, three regulatory sources said.

The Bank of Korea and the Financial Supervisory Service are jointly conducting the inspection, which is due to run until March 28, the sources said. Both the central bank and the FSS declined to comment.

The yuan holdings account for only 14.5 per cent of all foreign currency deposits in South Korea, and the total pales in comparison with about US$144 billion worth of such deposits in Hong Kong at the end of January or the US$32 billion held in Singapore at the end of last year.

Nevertheless, if deposits kept growing at the current pace - an almost 25-fold increase over six months - they could turn into a major external liability.

"The probe stems from the fact that the yuan is depreciating," said Park Sang-hyun, chief economist at HI Investment & Securities. "Losses are likely if this decline becomes a trend, so the authorities are probably looking to see what exactly is going on."


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