Regional Currency Settlements in East Asia: Risks and Tasks for Korea

Abstract

East Asian Countries has developed the financial cooperation via CMIM, ABMI after the Asian currency crisis. Lee and Park 2014) and Rhee and Sumulong (2014) advocate the use of local currencies in trade settlements. The regional currency settlements will reduce the USD dependency in the regional economy, so it will promote financial stability in the region. But they might induce risks for Korean economy. Korea’s trade accounts are deficit with Middle East and Japan and surplus with other regions. Most USD settled trade surplus comes from trades with China and ASEAN. Therefore, if the regional currency settlement increases in East Asia, then USD settled surplus would be shrunk considerably since the trade deficit with Middle East still would be settled in USD. The increased interconnection of regional economy may speed up the spread of financial crisis if it happens in the region. And it is possible that currencies in East Asia are valued as a bloc regardless of Korean macroeconomy conditions. Traders may choose only Yuan for their settlement when the regional currency settlement is promoted since China promoted Yuan internationalization. The convertibility of local currencies should be guaranteed to avoid any problem caused by USD surplus reduction problem. The crisis prevention effort should be strengthened and local currencies’ FX hedging tools should be provided to traders. We should make KRW more acceptable in the region in order to minimize potential risks associated with increased local currency settlements.