Since the Asian Financial Crisis, South Korea has pursued a delicate balance between openness and stability in its domestic financial markets. While foreign investors have seen improved accessibility in certain areas, key safeguards limiting international capital flows remain in place.
In January, South Korea’s Ministry of Economy and Finance announced it was considering reforms that would extend the trading hours of the South Korean won and allow international traders to participate in the market, constituting at least a partial reversal of the ban on offshore trading. The move is part of a campaign to signal the country’s interest in being recognised as a developed market by Morgan Stanley Capital International (MSCI).
South Korea has been granted developed country status in all major international economic organisations and other financial indexes, but has consistently fallen short of MSCI’s high market accessibility criteria. Despite the prestige associated with the elevated status — and the subsequent financial gains — this shift is also accompanied by some risks.
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Though the move is not enough to upgrade Korea’s classification, liberalising trade of the South Korean won constitutes a major step in that direction. First instituted in 1999, the ban on offshore trading has been upheld in support of the Bank of Korea’s ability to protect the value of the South Korean won through open market operations, especially during sudden market downturns.
Trading hours are currently open from 9am to 3:30pm, Korean Standard Time. Only domestic financial institutions can participate, with foreign investors required to carry out transactions through South Korean intermediaries. The possibility of extending trading hours to 24 hours a day and permitting offshore dealers to trade directly is under consideration. This change would address overseas investor concerns about the higher costs of trading in South Korean won and the difficulty of trading the currency after markets in Seoul close.
But South Korean government officials have not been as vocal about other issues blocking its MSCI ambitions. Longstanding issues such as the cumbersome registration process for foreign investors and the data restrictions that limit the availability of investment instruments have yet to be addressed. South Korea has also faced criticism for only partially lifting its short-selling ban last year. Continuing issues with past reforms make even optimistic investors cautious. Notably, the vaunted introduction of omnibus accounts for foreign investors in 2017 has not improved its MSCI rating in the relevant clearing and settlements category.
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Should South Korea eventually overcome these obstacles, there are some predictions regarding how increased capital flows associated with elevated MSCI status might benefit domestic financial markets. A report from Goldman Sachs this year assessed that it could generate an inflow of US$44 billion. It could also lead to improvements in key underlying factors contributing to South Korea’s valuation discount — such as lower levels of corporate governance, high earnings volatility and low medium-term earnings growth — which could lift the Korea Composite Stock Price Index by 35 per cent.
But there are areas of concern for South Korea should MSCI upgrade it, especially due to the reforms needed to get there. Some in South Korea are worried about the stability of the South Korean won as a result of the proposed currency trading reforms — despite government officials’ claim that: ‘It is easier to manage volatility if we extend the market hours and bring the offshore trade to the local market’. An index upgrade is also likely to favour large-cap stocks at the expense of smaller caps, exacerbating the already substantial divide between major conglomerates and small companies.
While it appears that trade in the South Korean won will be liberalised soon, this cannot happen immediately. Even if South Korea were to implement the proposed changes before the MSCI Market Accessibility Review comes out on 1 June 2022, the country would need to stay on the institution’s watchlist for at least a year before it could be reclassified.
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President Yoon Seok-yeol did not promote a policy of meeting developed country criteria in his campaign, unlike his competitor Lee Jae-myung. His outlook on deregulation could lead to the same outcome eventually, but rapidly pushing through reforms before 1 June is highly unlikely. Despite the recent attention, South Korea’s MSCI developed country status aspirations are poised to remain a long, drawn-out process.
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The South Korean Won is the currency of the Republic of Korea – more commonly known as South Korea. The won is a decimalized currency, divided into 100 jeon. The jeon is no longer used for ordinary, everyday transactions. For practical purposes, the lowest denomination of South Korean currency in use is 1 won.
The symbol for the South Korean won is ₩. Thus, an amount of 5000 won is expressed as ₩5000. The foreign exchange market designation for the won is KRW (an acronym for Korean Republic Won). As of late 2020, the USD/KRW exchange rate is 1107.12 – approximately 1100 KRW = 1 USD. Although high, the exchange rate has been remarkably stable for the past decade, primarily fluctuating between 1100 and 1200.
The Republic of Korea’s central bank is the Bank of Korea. It authorizes and oversees the minting and printing of South Korean currency by the Korea Minting and Security Printing Corporation, a government entity that also does the printing of important government documents.
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Both North Korea and South Korea refer to their currency as the won, and both use the same symbol – ₩, so it is important to clearly indicate which won you are talking about when discussing the currency. The foreign exchange designations are different – the North Korean won is designated as KPW.
The won’s existed as currency in Korea in some form for centuries, although other currencies, such as the Mun and the Yang, also served as the country’s legal tender at various times. The modern version of the won dates back to 1902, when it was simply the Korean won since, at that time, the divisions of North Korea and South Korea did not exist.
From 1910 to 1945, Korea was under Japan’s control, and the won was replaced with the Korean yen, tied to the Japanese yen. At the end of the Second World War, following Japan’s surrender, the United States and the Soviet Union occupied the southern and northern parts of Korea, respectively. The entities of North Korea and South Korea were created in 1948, and a new South Korean won currency was issued in 1949.
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The South Korean won was initially pegged to the US dollar at an exchange rate of 15 KRW = 1 USD. Unfortunately, the Korean War, which began in 1950, led to a succession of severe devaluations of the won, and by April 1951, the exchange rate with the US dollar was as high as 6000 KRW.
Between 1953 and 1962, the won was replaced with the hwan, but the won returned in 1962. As before, the won was pegged to the US dollar, this time with an initial exchange of 125:1. The peg rate was again adjusted several times upward during the ensuing years. Finally, in 1997, the Bank of Korea dropped the peg to the US dollar, allowing the South Korean won to float freely in the foreign exchange market.
With the increasing use of electronic payments in the country, the Bank of Korea is considering totally doing away with the production of won coins. However, the central bank has not taken official action in that regard as of 2020.
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With the reintroduction of the won as South Korea’s currency in 1962, the Bank of Korea initially issued coins in denominations ranging from ₩1 to ₩100. However, over the years, inflation led to the ₩1 and ₩5 coins being withdrawn from circulation in 1992. Retailers adjusted prices to minimum price changes of 10 won. Additionally, new coins with a value of 500 won were introduced. As of 2020, there are only four South Korean won coin denominations being minted – ₩10, ₩50, ₩100, and ₩500.
The initial 1962 series of won banknotes came in values that overlapped the coin denominations up to ₩100, only adding a single higher denomination banknote of ₩500. Inflation eventually led to the creation of higher denomination banknotes in the early to mid-1970s – ₩1000, ₩5000, and ₩10, 000.
To combat counterfeiting, various security features, such as color-shifting ink and microprint, were added to South Korean banknotes in the 1990s and into the 21
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Century. Further counterfeiting problems spurred the Bank of Korea to issue a new series of banknotes starting in 2006, with each denomination carrying up to 22 separate security features.
The current series of banknotes
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