According to the Financial Times, South Korea has lifted its 14 year ban on domestic financial institutions purchasing "kimchi bonds" (onshore foreign currency bonds intended to be exchanged for Korean won) in order to attract hedge capital inflows, influenced by the speculative boom in US dollar stablecoins. Previously, the Bank of Korea banned local investment in such bonds in 2011 due to concerns about currency mismatch risks. Nowadays, retail investors are flocking to overseas stock markets and the US dollar stablecoin market, causing the Korean won to weaken and foreign currency liquidity to be insufficient, prompting the Bank of Korea to adjust its policies.
The Bank of Korea stated that this move can improve foreign currency liquidity, alleviate the pressure of Korean won depreciation, and solve the imbalance between foreign exchange supply and demand. On Monday, the Korean won exchange rate rose to its highest level in eight months. In May, South Korea's foreign exchange reserves fell to a five-year low, which is the latest move by the government to relax foreign exchange controls and promote foreign currency inflows. The government has also raised hedging limits and relaxed restrictions on foreign currency loans. Analysts predict that more domestic companies will issue "kimchi bonds". Although the government hopes to appreciate the local currency and open up the market, considering that the financing cost of the US dollar is higher than that of the Korean won, domestic companies will not rush to issue "kimchi bonds".
