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(News Focus) Korea seen to tighten macro-prudential steps amid won's gain
By Kim Soo-yeon
SEOUL, Nov. 27 (Yonhap) -- South Korea's move to further limit bank's foreign exchange forward positions is seen as a harbinger of additional tighter rules on cross-border foreign capital flows as the local currency is on the rise amid ample global liquidity, analysts say.

   South Korea announced on Tuesday its plans to lower the ceiling of foreign exchange forward positions held by local and foreign banks by 25 percent in a bid to curb the volatility of cross-border capital movements. The move follows similar steps made twice since 2010.

   The government warned that it could take further actions, if needed, raising speculation that it may tinker with strengthening the current macro-prudential measures including bank levies or taxation on capital gains on bond investments by foreigners.

   The move came as the South Korean currency has appreciated more than 6 percent to the dollar so far this year amid liquidity unleashed by major central banks. In October alone, the won rose an average of 1.6 percent to the greenback, outperforming major Asian currencies.

   The government said Korea's relatively sound economic fundamentals and ample global liquidity are raising the chances that volatility of cross-border capital movements will increase.

   "The action can be seen as another form of intervention to slow the won's appreciation," said Byeon Ji-young, a currency analyst at Woori Futures Co.

   The won's gain came as a series of credit rating upgrades for Korea and quantitative easing by major central banks are spurring more foreign capital inflows into Asia's fourth-largest economy.

   A stronger won helps stabilize import prices, but it also hurts Korea's exports by making prices of export goods more expensive in overseas markets.

   Analysts said that once the government showed its readiness to take further actions, additional tighter rules may be enforced in a bid to fend off a potential increase in volatility in the FX market.

   "The tighter rules on banks' forward deals can be seen as an expression of the authorities' determination to stabilize the FX markets," said Jeong Young-sik, an economist at the Samsung Economic Research Institute.

   "There is a need to closely check excessive inflows of foreign capital even though new rules would not necessarily be unveiled soon."

   South Korea has taken three kinds of macro-prudential measures since 2010 as the country has undergone excessive foreign capital outflows and suffered from the won's sharp weakness whenever a financial crisis has cropped up.

   The government has said that the measures do not take on features of capital control steps, adding that the moves do not discriminate between residents and non-residents when applied.

   Korea has tightened the ceiling of foreign exchange forward positions held by local and foreign banks as lenders' excessive handling of forward deals aggravates the country's short-term foreign debt and puts further upward pressure on the won.

   Since the second half of last year, Korea has imposed a levy on banks' non-core foreign borrowing in a bid to avoid the repeat of market turbulences the country faced at the height of the 2008 global financial crisis. Korea also levies taxation on capital gains for foreigners' investment in state or monetary stabilization bonds.

   The so-called Tobin tax, a financial transaction tax, is being proposed in the political circle ahead of the December presidential election. But the government is currently opposed to the taxation on cross-border speculative hot money, but opened a door for some tailored form of such a tax.

   "It would be difficult to adopt the Tobin tax itself, but Korea needs to have some types of measures to ease foreign capital movements," Deputy Finance Minister Choi Jong-ku told reporters on Thursday.

   sooyeon@yna.co.kr
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