하나은행 하나금융연구소

I. China's Exchange Rate Regime Reform

The People's Bank of China announced its plan to enhance the RMB exchange rate flexibility by further strengthening reform of China's exchange rate regime on June 19, 2010
- In fact, China abandoned the dollar peg and has moved back into a managed floating exchange rate regime with reference to a basket of currencies which took effect in July 2005
China's managed floating exchange regime is a 'limited floating exchange system' based on market supply and demand and the government's intervention.’
- As a basket of currencies or effective exchange rate is expected to play an important
role in determining basic rate in the future and daily fluctuations in exchange rates has become wider, the appreciation of the RMB exchange rate is expected to continue, but the rate will further move both up and down.

II. Impacts of RMB Appreciation on China

While direct impacts of the RMB appreciation on China are limited, it will further cool
China's economy to some extent along with tight monetary policy
However, in the mid to long term, this will help shift its economic model from export
and fixed investment oriented model to household consumption oriented one and promote adjustment of industrial structure, and significantly contribute to strengthening China's position in the world
Meanwhile, the appreciation will add adjustment pressure on the stock market or real
estate market as part of wide impacts of tight monetary policy. Accordingly, as loan delinquency risks in the banking sector may exist, China should prevent such risks
on the contrary, as a new possibility of comsumer finance market growth resulting from recovery of domestic demand is being highlighted, China's foreign investment will expand due to strengthened purchasing power of RMB and glottalization of RMB is expected

III. Impacts on Korea's Economy and Financial Market

Weaker momentum of China's economy will further slow down Korea's economy in 2H, especially Korea's export of capital goods to China
- As economic relations between China and Korea have been closer in the process
of an international division of labor, Korea's economy has become more vulnerable
to China's economic adjustment including the RMB appreciation resulting from tight
monetary policy
Meanwhile, impacts of the won appreciation caused by internal and external economic slowdown resulting from China's yuan appreciation will not be bigger than in the past, However, it is likely to put adjustment pressure on the stock market in Korea along with adjustment of China's stock market

IV. Impacts and Implications on Korea's Financial Sector

Korea's financial sector should pay attention to risk management in China exposure resulting from China's macroeconomic adjustment. In particular, they should prevent possible delinquency of domestic export companies dependent on China's low cost competitiveness and exposure relating to the real estate market and stock market
Meanwhile, stronger regulations on hot money or emerging risks of China inevitably decrease Korea's investments in China. However, on the other hand, more China money is highly likely to flow into Korea based on strong purchasing power of China, thus, relevant services should be developed.
- In particular, since now China's portfolio in foreign exchange reserves concentrated on U.S, the huge foreign reserves are highly likely to be diversified. China money is likely to be invested in bonds in Korea. Accordingly, China's interest in Korea's stock market of real estate market is expected.
Besides, increased growth potential of the consumer finance market and Yuan settlement services resulting from China's domestic demand increase will provide more business opportunities for Korea's exporting companies. Accordingly, the financial sector needs to make preemptive measures