The interconnection between the exchange rates of China and South Korea is becoming increasingly tight, and when the RMB moves, the Korean won also follows suit.
On Monday, June 16, the Bank of Korea released a study indicating that South Korea needs to closely monitor the trend of the RMB exchange rate, especially during periods of global uncertainty caused by trade wars, as fluctuations in the RMB are likely to affect the movement of the won.
The research shows that there is a strong linkage between the Korean won and the RMB, with an average correlation of about 0.6 since 2018. This relationship becomes more apparent at certain times, including the escalation of US-China trade frictions from 2018 to 2019, the aggressive interest rate hike cycle by the Federal Reserve from February 2022 to April 2023, and changes in policy expectations after Trump's re-election in 2024.
Cho Sangheum, an economist at the Bank of Korea, explained during the press conference that the core reason for the enhanced linkage between the won and the RMB is the shared exposure to the US dollar exchange rate and the deep intertwining of trade relations between China and South Korea.
The study also points out that if Trump pushes for tougher trade protection policies during his second term, the sensitivity of the won to the RMB may further increase. This means that South Korea's monetary policy formulation and corporate foreign exchange risk management will face greater challenges, not only needing to watch US developments but also paying attention to how China moves.
Due to both economies being heavily reliant on trade, fluctuations in the RMB may also exacerbate volatility in the won. The central bank emphasized that it is necessary to closely track changes in China's trade policies under the ongoing global uncertainties.
The study also specifically notes that this exchange rate linkage has asymmetry. When the won depreciates, its linkage with the RMB strengthens. During periods of won appreciation, the linkage weakens relatively. The Bank of Korea stated that this imbalance is caused by factors such as joint depreciation against the US dollar and competition in export markets between the two countries.
On Monday, the won strengthened by over 1% against the US dollar. The offshore RMB rose slightly by 0.15%.
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