Unlocking Potential: The Impact of Opening Up Korea's Onshore Won Market

Korean won: The benefits of deliverability

Korean officials are planning to open up the Korean won onshore market to Registered Foreign Institutions and extend trading hours. We see this benefiting bid/ask spreads, risk management, and corporate liquidity programmes. These benefits could be with global financial institutions and corporates as early as the second half of 2024.

 

The motives

In a press release earlier this year, Korean officials pointed to the need to correct Korea’s restrictive FX market structure in order to improve the attractiveness of KRW-denominated assets and quicken the overall development of the capital market and financial industry. Many believe that one of the key goals of improving FX accessibility to Korea’s markets is to achieve high-profile inclusions into developed market benchmark indices such as the WGBI bond index and MSCI’s Developed Market equity index.

While acknowledging that improving market access to Korea’s FX market is a necessary but not sufficient condition for entering these indices – for example, another condition for Korea’s inclusion into the WGBI index is that Korean Treasury Bonds (KTBs) be euroclearable – Korean authorities presumably have eyes on the prize of a re-rating of local securities. For example, some regional benchmarks show Korean equities trading at some of the lowest book values in the region – e.g. at sub 1.00 versus levels of around 1.40 for China and Singapore. 

 

And, of course, inclusion into major bond indices can attract huge inflows and help government financing efforts. We assume that if included, Korean Treasury Bonds would join with a WGBI weighting of around 2- 2.5%. Some estimates put WGBI-related inflows into KTBs as high as $50bn. Index inclusion would also attract more long-term investors with the expected benefit of lower KRW volatility.   

On the subject of index inclusion, we think WGBI inclusion is likely to happen earlier than MSCI inclusion (a short-selling ban needs to be addressed here) and that the Korean government would no doubt welcome any announcement on WGBI inclusion before the national elections next April.

Looking at this topic from a more macro level, Korea is classified as an advanced economy by the IMF and is suitable for advanced economy classification in terms of per capita GDP, its considerable degree of industrialisation, its various export bases, and its financial sector integration into the global financial system. However, in financial markets, most Korean capital products are classified as emerging markets.

Up until recently, Korea has taken advantage of its open economy to sustain high growth rates, but at the same time, Korean financial markets have been quite sensitive and volatile to external shocks.  As a result, government control and monitoring of capital and financial markets has naturally become relatively tight. Also, the experience of the Asian financial crisis in 1997 hampered the structural reforms needed to develop domestic financial markets further.

 

FX reserves for selected countries and historical volatility readings for Asian FX pairs

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