Bank of Korea to Fully Allow Kimchi Bond Investments by Foreign Exchange Banks Starting on the 30th

The Bank of Korea announced on the 29th that, starting from the 30th, it will fully allow investments by foreign exchange banks and other foreign exchange business institutions in domestically issued foreign currency debt securities (Kimchi bonds) as part of efforts to resolve imbalances in foreign exchange supply and demand.

Since July 2011, foreign exchange banks, securities firms, and insurance companies registered for foreign exchange business have been prohibited from investing in Kimchi bonds issued for the purpose of being converted into Korean won for domestic use. The Bank of Korea had restricted foreign currency loans to residents only for genuine overseas demand since July 2010 to mitigate excessive volatility in capital inflows and outflows. However, after discovering that Kimchi bonds were being used as a means to circumvent these regulations, the Bank imposed investment restrictions on them.

However, the Bank decided to fully allow investments in Kimchi bonds after comprehensively considering the effectiveness of regulatory easing, the risk management capabilities of borrowers, and the introduction of other foreign exchange soundness measures.

Going forward, foreign exchange business institutions will be able to invest autonomously in Kimchi bonds regardless of the intended use of the issuance proceeds. However, foreign currency loans through privately placed Kimchi bonds are excluded from this regulatory easing. A Bank of Korea official stated, "This is because such loans are economically similar to foreign currency lending, and allowing investment could serve as a means to circumvent the restrictions on the use of foreign currency loans," adding, "We plan to consider a gradual easing of restrictions on foreign currency loans in the future."

The Bank of Korea also stated, "This measure is expected to improve foreign currency liquidity conditions and ease downward pressure on the Korean won, as companies supply or sell foreign currency raised through Kimchi bond issuance in the domestic foreign currency market or foreign exchange market. The revitalization of the Kimchi bond market will also expand corporate financing options and investment targets, thereby enhancing private sector autonomy and diversifying sources of income."

Meanwhile, according to a Bank of Korea survey, the outstanding investment balance of foreign exchange business institutions in Kimchi bonds (based on publicly offered bonds) fell sharply from $16.56 billion at the end of June 2011 to $160 million at the end of February this year following the introduction of the regulations.