Photo = Yonhap News Starting from the second half of this year, domestic companies will be able to pay for imports and exports in won when conducting trade transactions with some countries in ASEAN (Association of Southeast Asian Nations). In fact, for the first time, a way to pay for exports and imports in won instead of key currencies such as dollars has been opened. Companies are expected to be able to reduce currency exchange fees and lower the risk of exchange rate fluctuations.
A senior official from the Ministry of Strategy and Finance said on the 8th, “We are in the final stages of negotiations with ASEAN countries to introduce a Korean won payment system for export and import payments,” and added, “We plan to revise foreign exchange transaction regulations within the first quarter of this year and introduce a direct transaction system with some ASEAN countries from the second half of the year.” “It’s a plan,” he said. Previously, the Ministry of Strategy and Finance announced on the 4th in its ‘2024 Economic Policy Direction’ that it would introduce a Korean won payment system for corporate trade transactions. The International Finance Bureau of the Ministry of Strategy and Finance has been negotiating with ASEAN countries, including Indonesia, the Philippines, Vietnam and Thailand, to introduce a Korean won payment system since the end of last year. Indonesia is reportedly the top candidate.
The core of the won payment system is to relax the regulations on the transfer and disposal of won specified in the Foreign Exchange Transaction Regulations (Article 7-9). The intention is to partially allow this regulation only for trade transactions with specific countries.
For example, Korean companies can pay for imports and exports in won through a won account (Jayuwon account) of an ASEAN bank opened at a domestic financial company. There is no need to exchange dollars for won during the transaction process. Until now, the only transaction with Iran was that domestic companies paid for imports and exports in Korean won. It originated from a special situation created for trade transactions with Iran in 2010 when the United States enacted anti-Iran sanctions laws blocking dollar payments with Iran. The Ministry of Strategy and Finance plans to apply the won payment system on a pilot basis to some ASEAN countries and then expand it to other countries.
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Domestic small and medium-sized company A has always paid import and export payments in dollars when conducting trade transactions with companies in ASEAN (Association of Southeast Asian Nations) countries. The bank in the country where the company was located had to go through the cumbersome process of transferring dollars through the United States to the domestic main contract bank. In the process of receiving payment for export money converted into won, Company A not only had to pay a currency conversion fee to the bank, but also had to suffer from the risk of fluctuations in the won-dollar exchange rate.
Starting in the second half of this year, domestic companies trading with some ASEAN countries are expected to be able to further reduce this burden. This is due to the government’s decision to introduce a Korean won payment system for imports and exports to reduce transaction costs during trade transactions.
○Foreign exchange regulations maintained for 31 years
According to the Ministry of Strategy and Finance on the 8th, the current foreign exchange transaction regulations restrict overseas remittance of won deposited in domestic financial companies by non-residents, such as individuals and corporations. The government has put in place strong regulations to prevent the indiscriminate outflow of won.
Of course, there are exceptions. In principle, non-residents can freely exchange the deposited won into foreign currency and remit money by opening a Free-Won Account at a domestic financial company. As the first step toward internationalizing the won, it was first introduced in 1993 to provide foreign payment functions to the won. Non-residents, such as foreign corporations, can pay for goods in won to domestic companies through this free won account.
Although 31 years have passed since the system was introduced, trade transactions through the Jayuwon account were virtually ineffective. Although the government introduced a free won account, it has prohibited the transfer and disposal of won except for some transactions permitted through foreign exchange transaction regulations. Due to the US blockade against Iran in 2010, the Liberty One account was only used in the process of transactions with Iran. An official from the Ministry of Strategy and Finance pointed out, “In a situation where we experienced a foreign exchange crisis, there was quite a bit of fear about foreigners holding large amounts of won and sending it overseas.”
It is not that there were no attempts to expand Korean won payments. In 2015, a direct transaction market for won and yuan was opened in Shanghai, China. The foreign exchange authorities explain that this is a market created by companies in both countries to procure won and yuan when necessary, and that it is far from making payments for imports and exports. According to the Bank of Korea, as of the end of June last year, the proportion of dollar payments among domestic companies’ export payments reached 81.1%. The won rate is 2.8%. The Ministry of Strategy and Finance explains that this is not the import/export price paid in Korean Won, but rather the proportion of the currency specified in the contract, and there was virtually no Korean Won transaction during the trade transaction process.
○The first step toward internationalization of the Korean won
The government believes that, unlike the foreign exchange crisis in 1997 and the global financial crisis in 2008, macroeconomic indicators have become more solid. As of the end of last month, foreign exchange reserves amounted to $420.15 billion, and with ample ammunition, it is believed that it is time to unlock the domestic foreign exchange market. The introduction of a won payment system is also part of the plan to take the first step toward internationalizing the won while reducing transaction costs for domestic companies.
Starting this year, foreign financial companies located overseas will be allowed to participate in the domestic foreign exchange market and transact directly, and the closing time of the domestic foreign exchange market from July will be extended to 2 a.m. the next day when the London financial market closes, which is also putting a damper on the domestic foreign exchange market. It is part of a measure to solve the problem.
The government plans to focus on ASEAN countries, which are non-reserve currency countries, to introduce a Korean won payment system. We also took into account the fact that there is virtually no demand for Korean Won payments in reserve currency countries such as the United States.
If domestic company B exports a product to company C, an ASEAN company, company C can ask an ASEAN bank to convert the local currency into Korean won and remit the money. The domestic private bank that received the remittance request pays the export price to Company B in Korean Won. Private banks in Korea and ASEAN mediate direct transactions between the won and local currencies. Since there is no need to go through the process of exchanging money for dollars, transaction costs can be reduced and the risk of exchange rate fluctuations during the transaction process can also be reduced.
Reporter Kang Kyung-min/Park Sang-yong [email protected]
2024-01-08 09:27:59
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