The government announced a "roadmap for the internationalization of the won" in July, transitioning the currency from a "regulated currency" to a "freely convertible currency." The initiative aims to establish offshore won settlement infrastructure and expand the basis for won transactions and settlements abroad. While foreign investment in domestic securities has significantly increased, the foreign exchange trading infrastructure remains largely centered on the domestic market. The government's persistent efforts to address this imbalance are significant in themselves.
The Bank of Korea will introduce the "Korean Won International Payment Network" in January to enhance the convenience of won settlements for foreigners. This system will allow foreigners to open won accounts at their domestic banks, enabling them to transfer won among themselves, similar to how Koreans can open dollar accounts to transfer dollars domestically. This is expected to improve foreign access to the domestic financial market.
However, a sobering reality reveals that the international status of the won still has a long way to go. Last year, the proportion of export payments made in won was only 3.4%, while the share for import payments was 6.6%. Although the share of won payments has slightly increased, 84.2% of exports and 79.3% of imports are still conducted in U.S. dollars. Despite South Korea's economy ranking among the top ten globally, the won has yet to establish a significant presence as a global trading currency.
More crucial than simply opening the door to global investors is ensuring that they can experience liquidity and practical appeal when entering. An expert from an international financial organization suggested that advancing the internationalization of the won requires a comprehensive approach that combines "currency internationalization" with "government bond internationalization." As South Korean government bonds are successfully included in the World Government Bond Index (WGBI), global investors are beginning to view them as reliable, high-quality assets.
The key lies in the usability of these government bonds. If global investors or foreign banks can easily use South Korean government bonds as collateral for cross-border transactions, the narrative changes significantly. From the perspective of foreign investors, the won and South Korean government bonds become paired assets, elevating the won from merely a means of payment for goods and services to a critical collateral instrument for overseas financial transactions and funding. Only when the usability of government bonds is unlocked can the demand for the won diversify explosively, creating a virtuous cycle.
So far, about 68% of offshore won transactions have been concentrated in non-deliverable forward (NDF) contracts, which settle only in dollars without the physical delivery of won. This indicates a high demand for won transactions among foreign investors, but a lack of infrastructure for direct procurement and settlement of the currency. There are opinions that once the offshore payment network is opened and support for government bond collateral is provided, the market can finally expand from the distorted structure centered on NDFs to deeper markets such as spot foreign exchange, foreign exchange swaps, and the short-term won funding market.
Ultimately, the essence of the internationalization of the won is not merely to strengthen its value but to make it a deep and liquid currency. Simply loosening institutional regulations will not automatically attract global market participants to engage in transactions. A robust infrastructure must be established that allows global investors to use the won and government bonds as collateral at any time, managing risks effectively.
The phase of merely opening the door has ended. It is now time to actively coordinate a practical and attractive trading environment, including government bond collateral, so that foreign investors can freely transact in the sea of liquidity that the won offers.
* This article has been translated by AI.
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