South Korea plans to expand foreign investment in Korean bond trading and collateral scope to boost the Korean won and promote internationalization

1. On Sunday (July 19), the South Korean Ministry of Finance announced plans to allow foreign financial institutions to borrow Korean won through temporary overdrafts and permit them to use won-denominated bonds as collateral in financial transactions. These measures are part of incentive policies aimed at encouraging the use of the won, with the goal of transforming the won from a restricted local currency into a more global currency.2. Prior to the introduction of these measures, South Korea had already extended the trading hours of the USD/KRW market to a 24-hour system starting July 6, marking a move towards opening up its long-closed currency. These two initiatives are seen by some market participants as key steps in South Korea's bid for MSCI to upgrade its stock market from the emerging markets to the developed markets index.3. Due to the ongoing escalation of the US-Iran conflict, high oil prices, and capital outflows, the won's exchange rate has recently faced sustained pressure. In early July, the USD/KRW rate neared the 1,560 won mark. Analysts noted that foreign holdings of Korean bonds have reached around 200 trillion won. If the policy is implemented, it will significantly enhance the international accessibility of the won and attract more overseas capital into South Korea's bond market, thereby providing support for the won.4. However, the market is also paying attention to whether, amid the Federal Reserve's high interest rate environment, the won can reverse its downtrend solely through structural reforms, which still remains to be further verified.