South Korea releases kimchi bonds after 14 years to stem dollar flight

• South Korea lifts ban on kimchi titles
• Dollar-denominated stablecoins increase capital flight in the country
• Government aims to strengthen won with more external liquidity

After a 14-year ban, South Korea has lifted restrictions that prevented domestic financial institutions from buying kimchi bonds, in a bid to shore up foreign currency liquidity and stem pressure on the won. The move comes amid a growing outflow of domestic capital into foreign stocks and dollar-pegged stablecoins.

The ban, introduced in 2011 by the Bank of Korea, was intended to prevent currency imbalances caused by financial instruments issued by local companies. However, with the weakening of the won and a shortage of foreign exchange, the central bank decided to review the measure. Trading volume in crypto assets reached 57 trillion won (about $42 billion) in the first quarter of the year alone, reflecting strong demand for dollarized assets at retail level.

According to an official statement, “this measure is expected to contribute to resolving the imbalance in foreign exchange supply and demand, improving foreign currency liquidity conditions and easing pressure on the weak won.”

Although the lifting of the ban opens up space for new issuances, analysts say that adoption may be gradual, given the high costs of financing in dollars against the won. The won appreciated 1,2% on the announcement, reaching 1.347 per dollar, but quickly fell back to 1.353. Still, it has risen 8% this year, boosted by the election of new President Lee Jae-Myung, who promises more expansive fiscal policies.

The country's foreign exchange reserves have fallen to a five-year low, prompting the government to take other measures such as expanding hedging limits on currency derivatives and strengthening the swap line between the Bank of Korea and the National Pension Service.

The expectation now is that domestic business groups will start issuing kimchi bonds, with the aim of raising funds in dollars and converting them for domestic use, generating greater foreign exchange inflows. “There is a growing perception that the Korean won is very weak relative to its fundamentals,” said Hwang Sei-woon of the Korea Capital Market Institute.