SEOUL, May 3 (Yonhap) -- South Korea's financial authorities said Tuesday that they plan to extend the ongoing inspection into banks' currency forward trading and their handling of "kimchi bonds" amid a surge in short-term overseas debt.

   The Bank of Korea (BOK) and the Financial Supervisory Service (FSS) are conducting a joint inspection of four banks -- one local and three foreign banks -- over currency forwards, which will run until Friday.

   They said in a joint statement that they will probe at least two more banks as early as in mid-May as the sale of "kimchi bonds" has been on the sharp rise, increasing market instability. But the specific number of banks and the timing have yet to be decided, they added.

   "Targets of banks will be selected by taking into account the track records of non-deliverable forwards trade and the size of handling such bonds," said an official at the BOK.

   "Kimchi bonds" refer to foreign-currency debt issued by local and foreign companies in South Korea. Excessive sales of kimchi bonds have been blamed as the main reason for rising short-term foreign debt, putting upward pressure on the local currency. The Korean won has risen more than 6 percent to the dollar since January.

   Companies typically issue kimchi bonds to raise dollars to settle transactions with foreign partners, and the proceeds of the debt sales are restricted to foreign-currency transactions.

   But some local firms sold kimchi bonds to swap the dollar into the won through local branches of foreign banks, given that the sale of foreign-currency bonds is cheaper than that of won-denominated ones.

   The inspections came as a rebound in the country's short-term overseas debt is feared to hurt market stability.

   The government is considering measures to further strengthen its regulations on banks' trading of foreign currency forwards in a bid to smooth excessive movement of foreign capital. Last year, South Korea lowered the ceiling of currency forwards deals held by foreign banks' local branches to 250 percent of their equity capital.

   The regulations helped the country reduce short-term borrowing late last year, but since the start of this year, such foreign debt has been sharply rising.

   According to the BOK, short-term borrowing came in at a net $6.72 billion in March, the highest mark since $6.81 billion in August 2008.

   In a related move, South Korea plans to impose a levy on banks' non-deposit foreign currency borrowings starting in August in a bid to curb excessive capital flows.

   sooyeon@yna.co.kr
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