Problems relating to Trade and Investment on Korea
12. Exchange controls |
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Issue |
Issue details |
Requests |
Reference |
| (1) Borrowing in Foreign Exchange is restricted | - The degree of freedom is low in foreign exchange transactions. Enterprises are unable to borrow in foreign exchange for the purpose of hedging the foreign exchange risk. | - It is requested that GOK liberalises foreign exchange transactions. | - Foreign Exchange Control Act, etc. |
| (Action) - Since January 2006, Bank of Korea (BOK) has repealed the licensing system for capital transactions. Only declaration is necessary for non-residents' bank borrowing in won. Such declaration is exempted for transactions in less than 10 billion won. - Since December 2007, BOK has been promoting the following measures: 1) Repeal of licensing system for import/export in South Korean Won. 2) Integration of Non-residents' Similar South Korean Won Accounts. 3) Enlargement of tax exemption declaration limit to 30 billion won from 10 billion won. 4) Grant of permission for settlement of account in South Korean Won at overseas' foreign exchange. - Response to the 2008 Proposition states: "Continued restriction is necessary in order to control the lending of operating fund for the domestic use to foreign exchange lending and foreign exchange application period, made to hedge foreign exchange risks." - On 13 June 2010, GOK promulgated the rule that sets forth the ceiling in the amount of forward booking by financial institutions, restricting the disposition of foreign exchange borrowings by enterprises. - The ROK foreign exchange transactions principle is based upon: (1) Liberalised in principle, restricted in exceptional caes, and (2) real demand principle, compelling foreign exchange banks to confirm the real demand in transactions. |
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| (2) Restricted Setting Off of Debtors/Creditors Accounts and External Remittance of Foreign Currency Fund | - GOK strictly controls offsetting debtors/creditors account with non-residents, and external remittance in foreign currency fund. Even where such transactions are allowable, the procedures are complex for obtaining licences and approvals. | - It is requested that GOK liberalises the Korean Won exchange market to non-residents. | - Foreign Exchange Control Act, etc. |
| (Action) - GOK has exempted the requirement for submission of payment/receipt vouchers upon payment/receipt of consideration for export/import concerning enterprises with the import/export performance results of more than US$50 million, pursuant to its foreign exchange liberalization policy. - On 8 November 2007, Ministry of Finance and Economy released "Policy to improve foreign exchange system to construct a market-friendly foreign exchange system". - Obligation to file return is compulsory for Netting (Setoff): (1) Resident(s) must file return to ROK banks in settlement of external transactions with non-resident(s) by setting off the debtors and creditors account. (2) An FFE with domestic investment exceeding USD 10 million under the foreign investment law (the foreign investment promotion act) as a foreign investment company in setting off the debtors and creditors account must file return to foreign exchange banks. |
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| (Improvement) - In December 2007, GOK amended the foreign exchange transactions regulations to exempt requirements for the proof of payment up to US$50,000 per year, where transactions are routed via designated foreign exchange banks. |
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| (3) Rapid Exchange Fluctuations | - Radical exchange fluctuations prevail. As it stands, Member Firm's Subsidiary (MFS) benefits from exchange gain on a direct export transaction in yen. Nevertheless, negotiation for raise in price is difficult. In a transaction between related parties, the prevailing Yen depreciation enables MFS to offer special prices to its customers. However, MFS runs on a thin margin, so that if the exchange rate swings toward appreciation of Yen, it will instantly show operational loss: such is the severity of the fluctuation band. | - It is requested that the government of ROK will use its best efforts to: -- stablise the exchange rate fluctuations, and -- keep the fluctuation band within 6%. |
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