South Korea unveils currency controls

City A.M. Reporter
SOUTH Korea yesterday unveiled long-anticipated currency controls, saying it aimed to curb the rapid shifts in capital flows linked to short-term foreign debt and posed a risk to the world’s ninth-biggest exporter.

The authorities, alarmed by the won’s sharp swings during recent market turbulence caused by Europe’s debt problems, have been priming investors for weeks for action aimed at stabilising its currency and cooling overseas borrowing. The restrictions slap limits on banks’ and other financial institutions’ currency forwards, cross-currency swaps as well as non-deliverable currency forwards.

“These measures are aimed at reducing the volatility in capital flows that poses a systemic risk in the country,” South Korea’s finance ministry, two financial regulators and the central bank said.

The new rules will cap domestic banks’ and non-bank financial institutions’ currency forwards and derivatives at 50 per cent of their equity capital. The cap for foreign bank branches was set at 250 per cent of equity to account for lower capital, which on average is just 1/30 of that held by domestic banks.

Officials brushed off suggestions the regulations, which follow liquidity controls and curbs on companies’ currency trades announced in November, could hurt investor confidence. “We will stick to a principle of an open market and liberalisation of capital transactions. That is a promise we have globally made,” said deputy finance minister Yim Jong-yong.