By Lee Hyo-sik
Staff Reporter




China’s revaluation of its currency will have negative impacts on South Korea’s financial market as the won is expected to strengthen sharply against the U.S. dollar and the stock market is expected to retreat from its recent ascent.

Analysts said that a yuan revaluation will result in a further appreciation of the won, which will hurt the profitability of Korea’s exporters and worsen the investor sentiment in the booming stock market.

``The effects of a revaluation of the Chinese currency on the Korean economy and financial market are negative as the currency market will use this opportunity to push the won up even more,’’ said Shin Min-yong, senior economist at LG Economic Research Institute (LGERI).

The won closed at 1,021.3 won against the dollar on Friday, sharply down 14.2 won from the previous day’s close.

Shin said that a stronger yuan will also likely reduce Korea’s exports to China, its largest export market, as a slowdown in China’s exports will demand fewer Korean parts and intermediary goods.

Industries such as electronics, electricity and petrochemicals would experience difficulties as most of the industries export products indirectly via China routes.

``The stock market is expected to undergo correction phases over the next several weeks because equity investors are poised to take profits from the recently surging stock market. They see the revaluation of the Chinese yuan as an opportunity for profit taking,’’ Daishin Securities analyst Yang Kyung-sik said.

The Korea Composite Stock Price Index lost 0.43 points from the previous trading, closing at 1,074.22 Friday.

China’s central bank abandoned the yuan’s decade-long peg against the dollar Thursday by raising the value of the currency to 8.11 yuan against the dollar from the previous 8.28.

The People’s Bank of China said that the yuan’s value would be linked to a basket of currencies of China’s main trading partners.

China had been under pressure from its trading countries, including the United States, to remove the yuan’s peg against the dollar and let the market decide the appropriate value of the currency.

Other countries complained that China’s fixed foreign exchange regime give Chinese exporters unfair price advantages as the devalued yuan make prices of Chinese goods cheaper in the global market.

Koo Kil-mo, senior foreign exchange trader at the Korea Exchange Bank, said that the Korean won is expected to strengthen further down the road as the market expects China to revalue its currency several more times.

``The market consensus is that the won will be forced to appreciate even higher against the dollar in line with a series of China’s revaluation of its currency in the future. It will have more of a negative impact on Korean exporters in overseas markets than their Chinese counterparts due to the superior price-competitiveness of Chinese goods,’’ Koo said.

However, the government dismissed concerns over the possible negative impacts of the yuan’s revaluation on the Korean economy and financial market, saying that the move has long been anticipated and the scope of the adjustment is smaller than expected.

``China’s move to raise the value of its currency by two percent will have a limited impact,’’ Finance-Economy Minister Han Duck-soo said, adding that it removed uncertainties existing in the international foreign exchange market, reducing the possibilities of currency speculation on the won.

Han said that the government will closely monitor movement in the currency market in cooperation with the Bank of Korea to prevent any negative factors from affecting the financial market.

The government and the central bank will soon form a currency task force to keep an eye on the foreign exchange market.

``The currency market seems to cope well with the yuan revaluation. But when the won strengthens too sharply against the dollar, the government will take any necessary measures to stabilize the market,’’ said Choi Hee-nam, director of foreign exchange division at the Ministry of Finance and Economy.

His remarks indicate that the government would intervene in the foreign exchange market to stop the won’s rise if necessary.

Chang Jae-chul, chief economist at Samsung Economic Research Institute, said that Chinese consumers may buy more Korean products as their purchasing power increases with a stronger yuan, which will boost Korea’s exports of consumer goods to China.

``If the won does not rise against the dollar as sharply as the yuan, Korean firms will also be able to ship more products overseas thanks to improved price-competitiveness over their Chinese rivals,’’ Chang said.

leehs@koreatimes.co.kr