the International Monetary System 19년 2월 19일 15시 24분 36초 Currency Internationalization, and International Monetary Reform - Korea’s Experience and Future Issues - The Future of the International Monetary System December, 2011 Shin, Je-Yoon Vice Minister SUNGSOO EUN Director General International Financial Policy Bureau Ministry of Strategy and Finance Republic of Korea HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 36초19년 2월 19일 15시 24분 36초 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt

Internationalization of Korean Won HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 36초19년 2월 19일 15시 24분 36초 19년 2월 19일 15시 24분 36초 Contents Ⅰ Background Ⅱ Internationalization of Korean Won Ⅲ Issues to be discussed 1 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 1 1

Background Contents Ⅰ Ⅱ Ⅲ (1) Current International Monetary System HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 36초19년 2월 19일 15시 24분 36초 19년 2월 19일 15시 24분 36초 Contents Ⅰ Background (1) Current International Monetary System (2) Emerging Markets; Original Sin? (3) Policy Actions by Korean Government (4) Needs of Currency Internationalization Ⅱ Ⅲ 2 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 2 2

Development of Financial Sector Dollar domination in FX transactions 19년 2월 19일 15시 24분 36초 Ⅰ- (1) Current International Monetary System What is the problems? Highly Volatile & Excessive Capital Flows (But, No Rules to Manage) → Sudden Stops and Rapid Reversals of capital flows High Dependence on USD → Global liquidity fluctuations depending on US economic conditions Development of Financial Sector Dollar domination in FX transactions USD trillion Source : The Banker, World Bank, BIS 3 Source : BIS HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 3 3

Ⅰ- (2) Emerging Markets ; Original Sin? 19년 2월 19일 15시 24분 37초 Ⅰ- (2) Emerging Markets ; Original Sin? Impacts on EMs – Korea’s experience Original sin → Financial fragility caused by either ‘currency mismatch’ or ‘maturity mismatch’ Vulnerability to ‘twin crises’ → $ 21.4 billion outflows(4% of GDP) in 5 months in 1997 → $ 69.5 billion outflows(7.5% of GDP) in 4 months in 2008 Capital inflows/outflows (USD, billion) FX rate (won/dollar) movements ‘95.1 ‘97.11 ’98.4 ’08.9 ’09.1 ’12.9 78.1 221.9 116.4 -21.4 -69.5 Financial Crisis Asian crisis Global financial crisis 5 months 4 4 months HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 4 4

Measures to deal with volatile capital flows 19년 2월 19일 15시 24분 37초 Ⅰ- (3) Policy Actions by Korean Government Measures to deal with volatile capital flows Foreign exchange derivatives position ratio → ceilings on net foreign exchange derivatives position ratio of domestic banks and foreign bank branches has been set at 30% and 150%, respectively, of their capital Macro-prudential stability levy → bank levy is charged on non-deposit foreign currency liabilities at between 2~20bp, depending on the maturities of debt instruments Restoration of the tax on foreign holdings of KTBs and MSBs → withholding tax on interest income and capital gains of foreign holdings was restored FX derivatives position Macro-prudential stability levy 5 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 5 5

Problems of current IMS 19년 2월 19일 15시 24분 37초 Ⅰ- (4) Needs of Currency Internationalization Problems of current IMS Policy Response Deal with volatile capital flows Excessive Capital Flows Single currency for the multi-polar economies ? High Dependence on USD Currency internationalization efforts by emerging economies is needed for more resilient and stable international monetary system. 6 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 6 6

Internationalization of Korean Won HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Contents Internationalization of Korean Won Ⅱ (1) Current Landscape of Korean Won (2) Key Challenges for Won Internationalization (3) Way Toward Successful Won Internationalization Ⅱ Ⅲ 7 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 7 7

Korea’s currency internationalization efforts so far HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (1) Current Landscape of Korean Won Korea’s currency internationalization efforts so far No hurdle in basic transaction of won and won-denominated current transaction Regulations concerning capital account transactions in won to some extent 1988~1992 Contracts of won-denominated current transactions and capital transactions were liberalized unit of Account Exchange of won contracts of current transactions contracts of capital transactions payment and settlement current transactions capital transactions * off-shore settlement btn non-residents store value deposits Borrowings Securities purchase and issuance 1996 Payment and settlement of current account transactions in won were liberalized 1999~2001 Deposits were liberalized via ‘free won account’ 2001 Purchase of won-denominated securities by non-residents was liberalized * borrowing over KRW 30 billion * securities issuance abroad 2001~2007 Borrowing by non-residents was allowed up to KRW 30 billion free reported 8 prohibited HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 8 8

Ⅱ- (1) Current Landscape of Korean Won HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (1) Current Landscape of Korean Won International use of the Won Currency use in international trade of Korea medium of exchange / unit of account → won is hardly used in foreign trade of Korea store of value → foreign investments in Korean Bond have increased recently *2010, percentage of total trade <Import> Purchase of KTBs by foreign Central Banks *2008.1-2012.10, KRW billion 1224 3128 7477 15762 28194 35470 12.10 <Export> 9 Source : Korea Customs Service HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 9 9

Ⅱ- (1) Current Landscape of Korean Won HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (1) Current Landscape of Korean Won Comparison with other emerging market currencies won-denominated bonds account for only 0.6% of total EM currencies bond issuance trading volumes of won FX derivatives are bigger than those of most EM currencies → Still, however, it constitutes a small amount of world total trading volumes of FX derivatives → the lack of hedging instruments could be a major impediment to more use of EM currencies International bond issuance in EM currencies EM currencies: OTC FX derivatives turnover *percentage of Total EM issuance *share percentage out of 200 percent 10 Source : BIS Quarterly Review March 2011 Source : BIS Quarterly Review March 2011 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 10 10

Ⅱ- (2) Key Challenges for Internationalization of the Won HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (2) Key Challenges for Internationalization of the Won Potentials for internationalizing Won Demand side factors → Economic size, Network effects, Invoicing practices Supply side factors → Domestic financial market depth, Financial openness, Policy support Economic size : Share of World GDP (2011, %) “Efforts to create international demand for the Korean won were hampered due to established practices of pricing and invoicing trade in U.S. dollar and European currencies.” Takagi, 2009; Xu, 2009 11 Source : IMF WEO on Oct 2012 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 11 11

Risks to monetary and financial stability HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (2) Key Challenges for Internationalization of the Won Risks to monetary and financial stability Increased offshore activities and offshore-onshore links → reducing the authorities’ control over monetary aggregates and domestic interest rates → straining the financial system’s ability to adequately absorb capital flows Financial openness Exchange rate stability Monetary independence 12 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 12 12

Expanding the use of won HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (3) Way Toward Successful Won Internationalization Balanced approach Push forward won internationalization → But balanced approach is needed to ensure stability Trade first, capital transaction second 1st step 2nd step Trade Expanding the use of won Capital transaction Macro-prudential measures Full Liberalization 13 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 13 13

Cooperation with China and Japan HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (3) Way Toward Successful Won Internationalization Cooperation with China and Japan Korea’s position between two huge economies ; “double edged sword” Challenge for expanding regional acceptance of Won Chance for enhancing Global use of Won 117 Kor-Chi-Jap’s share of global GDP (2011, %) Export and Import Values of Kor-Chi-Jap 68 40 121 162 134 86 *2011, US$ billion 184 69 10.5 8.4 1.6 20.5 14 Source : Ministry of Finance, Japan Ministry of Knowledge and Economy, Korea Source : IMF WEO on Oct 2012 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 14 14

Payments in Won and RMB for trade between Korea and China HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (3) Way Toward Successful Won Internationalization Payments in Won and RMB for trade between Korea and China Use of currency swap between Korea and China (KRW 64 trillion / RMB 360 billion) → BOK supplies RMB liquidity to Korean banks and PBOC supplies Won liquidity to Chinese banks 117 BOK Account of PBOC Won PBOC Account of BOK RMB 69 Won Won Chinese Bank Korean Banks Ask payment to the exporting company Won Won Chinese Importing company Korean Exporting company Commodities 15 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 15 15

Ⅱ- (4) Way Toward Successful Won Internationalization HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (4) Way Toward Successful Won Internationalization Regional Financial Cooperation (1) Chiang Mai Initiatives Multilateralization → firewall for Asian countries to respond to regional crisis Agreements in 2012 AMRO Doubling the total size From 120 bn US$ to 240 bn US$ Increasing the IMF-delinked portion From 20% to 30% in 2012, and review in 2014 Lengthening the maturity From 90 days to 1 yr(linked), to 6 mths(de-linked) International organization Introducing crisis prevention function One, Simplified and Flexible 16 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 16 16

Regional Financial Cooperation (2) HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅱ- (5) Way Toward Successful Won Internationalization Regional Financial Cooperation (2) Asian Bond Market Initiative → develop local currency denominated bond markets → recycle regional savings into regional investments New roadmap+ in 2012 Direction 1 To produce tangible outcomes, current and critical ongoing issues need to be further developed Direction 2 To strengthen the momentum for the ABMI discussion, important but undiscussed issues related to bond markets should be added Direction 3 To meet and accommodate the changing global financial needs, including mitigation of volatility in the capital flow, relevant issues need to be addressed 17 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 17 17

Issues to be discussed Contents Ⅲ Ⅱ Ⅲ (1) Sequencing issues HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Contents Issues to be discussed Ⅲ (1) Sequencing issues (2) The Benefits and Costs of Currency Internationalization (3) The Role of Capital Flow Managements (4) Currency Cooperation at the Regional Level Ⅱ Ⅲ 18 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 18 18

Pre-requisite steps to successful currency internalization HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅲ-(1) Sequencing Issues Pre-requisite steps to successful currency internalization Ensuring macroeconomic stability Capacity building to control liquidity and credit growth effectively Developing or deepening domestic financial markets Capital account liberalization Are Asian emerging countries ready for currency internationalization? What is needed to facilitate the process towards currency internationalization? 19 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 19 19

Ⅲ-(2) The Benefits and Costs of Currency Internalization HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅲ-(2) The Benefits and Costs of Currency Internalization Reducing the need for large foreign exchange reserves Eliminating the exchange rate risk in external transactions Benefits Costs Restricting the pursuit of domestic monetary policy Worsening the problems caused by excessive capital inflows Is it good for emerging market countries to push forward their currency internationalization? How can we maximize the benefits and minimize the costs? 20 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 20 20

Emerging Market Countries Capital Flow Management HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅲ-(3) The Role of Capital Flow Management Advanced Countries Emerging Market Countries Capital volatility caused by pull factors (differences in growth rates and interest rates etc.) Capital Flow Management (CFM) Capital volatility cased by push factors (spillovers of advanced countries’ expansionary monetary policies) Prudent macro-economic policy first, CFM as the last resort CFM complementing macro-economic policies (No sequence in both) Overall and mandatory capital liberalization Sequential capital liberalization (Reducing negative impacts of capital liberalization is first) Is CFM helpful for Emerging Markets’ currency internationalization and stable IMS? Is it possible to develop a global rule to manage capital flows? 21 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 21 21

Ⅲ-(4) Currency Cooperation at the Regional Level HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Ⅲ-(4) Currency Cooperation at the Regional Level Short-term Long-term Use of local currency for local trade settlement Asian common currency? (Lessons from the Eurozone crisis) Asian Monetary Unit How can we establish effective local currency trade settlement system in Asia? Is it desirable or realistic for Asia to have a single currency? 22 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 22 22

HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt 19년 2월 19일 15시 24분 37초19년 2월 19일 15시 24분 37초 19년 2월 19일 15시 24분 37초 Thank you !! 23 HALFWAY\Artwork Design by HK Pres Center\POWERPOINT TEMPLATE\whiteSwan\HENGDA Template_v1.ppt 23