SEOUL: South Korea said Thursday it is considering investing part of its foreign exchange reserves in yuan-denominated Chinese securities to diversify its portfolio and shield it from the volatile dollar.
"Our bank seeks to increase its investment in China, which is now a growing big market, as part of our long-term strategy," a spokesman at the central Bank of Korea told AFP.
As an initial step, the BOK has applied for qualified foreign institutional investor status in China, he said.
Only approved foreign institutions are allowed to invest in China's stocks and bonds, in accordance with quotas set by Beijing's financial authorities.
"But the scale of our investment will be small," he said, adding the BOK has yet to win approval from Beijing.
The BOK has tried to diversify its portfolio as its reserves rose to a record high of $307.2 billion at the end of April, the world's seventh largest after China, Japan, Russia, Taiwan, Brazil and India.
Hong Taeg-Ki, chief of the bank's reserve management group, told Dow Jones Newswires Wednesday that China would be "a good investment destination for us in the mid- to long-term, given the country's efforts to make the yuan a global currency".
China is stepping up efforts to internationalise the yuan and allow it to take on a greater global role in line with its growing economic might.
South Korea's foreign exchange reserves need to be diversified to include yuan assets, Hong said, although he added that any significant move is not likely in the near term given Beijing's strict rules on investment by foreigners.
"China's opening of its capital markets to foreigners is still very limited. They say foreigners can invest up to $1 billion, but actually foreign investors hardly ever own as much as $200 million," he said.
South Korea currently invests in yuan assets by way of its contribution to the Asian Bond Fund, but the amount is "negligible", Hong said.
The BOK has said it is diversifying its investments to include assets denominated in major currencies other than the US dollar to protect it from the volatility of the greenback, which has been hit by concerns over the US economy.
The proportion of dollar holdings in South Korea's portfolio declined for the second straight year in 2009, but it rebounded slightly last year. As of the end of 2010, US dollar-denominated assets accounted for 63.7 percent of the country's forex reserves.
Hong said the central bank's move to invest in yuan assets does not mean an immediate change in investment strategies nor is it aimed at reducing the US dollar's position in its foreign exchange reserves.
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