(Corrects 2012 stock inflows in fourth paragraph of story published Jan. 30.)
South Korea’s won weakened and government debt fell after Deputy Finance Minister Choi Jong Ku said taxes on currency trading and bonds should be considered to help limit “speculative” inflows of capital.
The government wants to cut the “vicious cycle” in which fast money inflows increase won volatility, Choi said at a forum hosted by the Korea Institute of Finance in Seoul today. Choi said his government is in talks with China and Southeast Asian nations to reduce their Korean bond purchases, and that he sometimes questions whether a flexible exchange rate is “appropriate” for South Korea.
The government will soon decide on “tax measures that are suitable for our market conditions,” Choi said. “South Korea opposes a tobin tax in its traditional form, as it could cause unintended consequences in the market,” he said, referring to the concept of a charge on international flows of money and named after James Tobin, the Nobel Prize-winning U.S. economist who first suggested the idea in 1971.
The won fell 0.3 percent to close at 1,085.46 per dollar in Seoul, according to data compiled by Bloomberg. The currency strengthened 0.9 percent yesterday following a 1.7 percent slide on Jan. 28. It rose 8.3 percent in 2012, the most among 16 major currencies tracked by Bloomberg, as overseas investors pumped $15.1 billion into Korean stocks.
Global funds cut their holdings of Korean shares for a fifth day, adding to net sales of $1.6 billion this month through yesterday.
Policy makers will curb “unnecessary use” of foreign currencies in import transactions by state-run firms and closely monitor other major companies’ cross-border payments, Choi said.
“Authorities are signaling tighter regulations to reduce volatility,” said Sun Sung In, an analyst at Shinhan Investment Corp. in Seoul. “Won moves have been too volatile lately due to capital inflows and outflows and authorities want to eliminate the risk.”
A stronger currency may cut 2013 operating profit by more than 3 trillion won ($2.8 billion), Samsung Electronics Co. said last week after announcing fourth-quarter earnings.
Sharp fluctuations in capital flows are a key concern, given the country’s reliance on trade, Ha Sung Keun, a board member of the South Korean central bank, told reporters in Seoul Jan. 28. Exports are equivalent to about half of the nation’s gross domestic product.
Choi said today the government may further tighten restrictions on banks’ currency forward positions. South Korea on Nov. 27 capped currency forward positions at 150 percent of equity for branches of foreign bank. The limit is 30 percent of equity for domestic banks.
“Market participants may have a different idea but won trading in the non-deliverable forwards market is a big factor in widening won volatility,” he said. “We’re closely looking at it and may tighten rules to curb such volatility.”
One-month implied volatility in the won, a gauge of expected moves in the exchange rate used to price options, dropped 13 basis points, or 0.13 percentage point, today to 7.85 percent. It reached 9.63 percent yesterday, the highest level since July. The yield on South Korea’s 2.75 percent bonds due September 2017 rose four basis points to a three-week high of 2.91 percent, Korea Exchange prices show.
The currency strengthened as much as 0.3 percent earlier today after reports showed industrial production unexpectedly climbed 1 percent in December from the previous month and the current account recorded a $2.25 billion surplus. Output was forecast to fall 1.5 percent, according to the median estimate in a Bloomberg survey.
“The economic indicators confirmed views that South Korea’s economy is recovering, while continued surplus in the current account brings in more dollars,” said Hong Seok Chan, an analyst at Daishin Economic Research Institute in Seoul. “Currency investors are likely to track purchase and sales of stocks by foreign funds.”
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