South Korea has announced the termination of a 14-year-old ban that prohibited domestic financial institutions from investing in Kimchi bonds that are issued for use within the country. The move is part of a broader strategy to enhance foreign exchange liquidity and alleviate downward pressure on the Korean won.
Kimchi bonds are debt securities denominated in foreign currencies—typically U.S. dollars—but issued within South Korea by foreign or domestic entities. While these instruments have historically been used by overseas investors to gain exposure in the Korean market, local institutional participation has been restricted since the global financial crisis of 2008. The ban was initially implemented to prevent volatile capital flows and protect the domestic bond market.
By lifting this restriction, South Korean financial authorities aim to diversify sources of foreign exchange funding and increase the attractiveness of local debt markets to institutional investors. Officials noted that the change aligns with current market conditions and is intended to help stabilize the won, which has recently faced pressure from a strengthening U.S. dollar and global uncertainty.
The policy shift is expected to encourage greater participation from domestic pension funds, insurers, and asset managers, who may now find value in increasing their exposure to foreign currency-denominated securities without needing to invest through offshore channels.
Analysts believe the move could contribute positively to foreign reserves, reduce the premium on hedging costs, and support overall market liquidity. The updated policy also brings South Korea into closer alignment with investment frameworks in other developed economies, where local institutions are generally allowed to buy domestically issued foreign-currency bonds.
The decision comes amid broader efforts by South Korea’s financial regulators to enhance the resilience of its markets and attract more international investors through deregulation and modernization of financial infrastructure.
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