S Korea regulators launch probe into China banks’ operations

March 19, 2014 8:10 am
S Korea regulators launch probe into China banks’ operations
By Song Jung-a and Simon Mundy in Seoul
South Korean financial authorities have launched an inspection of three Chinese banks’ operations in the country, amid worries about booming demand for renminbi-denominated investment products.

Bank of China, Industrial and Commercial Bank of China and China Construction Bank are all being probed by Seoul’s Financial Supervisory Service and the Bank of Korea over whether the banks violated currency management rules as they accepted billions of dollars’ worth of renminbi deposits in recent months.
Lee Jong-uk, the FSS director in charge of the investigation, said the investigation would run until March 28, and would report in about four months.
The team is also inspecting Barclays, but the UK bank does not deal with renminbi deposits in South Korea, and officials said that it had been included as part of routine checks on foreign banks.
The inspection reflects nervousness in South Korea about exposure to the Chinese financial sector. This month Shanghai Chaori Solar defaulted on an interest payment – the first domestic bond default by a Chinese company in recent history.
Haixin Steel, a privately owned steel mill, also failed to repay loans that fell due this month, and Chinese Premier Li Keqiang said last week that further defaults are “unavoidable” as financial deregulation gathers pace.
South Korea’s ties to the Chinese financial sector have been boosted by a surge in renminbi deposits by South Korean investors, which increased to a record $7.62bn at the end of February, compared with $505m as of July and $170m at the end of 2012.
Chung Jin-woo, a manager on the BoK’s capital flow analysis team, said the increase has been driven by investment in structured products offered by brokerages that sell asset-backed securities to local institutions. They convert the proceeds into dollars and then renminbi – typically on the Hong Kong market – which are deposited in Chinese banks’ local subsidiaries.
He said the securities offered an interest rate of about 3.3 per cent, against the typical rate of 2.8 per cent for won-denominated institutional bank deposits.
The pace of growth in renminbi deposits has slowed in recent months following a warning to the banks by regulators.
“We asked Chinese bank branches here to slow their renmimbi deposit-building late last year as part of our risk management, because it is not desirable for local investors to have too big exposure to one country,” said Cho Sung-rae director of foreign currency supervision at the FSS.
“We are in discussion with other related ministries to see if regulations are needed to curb renminbi deposits here.”