After South Korea’s stock market was shut out of MSCI’s developed-market watchlist for the 12th consecutive year, the government has finally unveiled the most significant overhaul of its foreign exchange regime since the 1997 Asian financial crisis. On July 19, South Korea’s Ministry of Economy and Finance, the Bank of Korea, the Financial Services Commission, and the Korea Securities Depository jointly released the “Korean Won Internationalization Roadmap.” The core objective is to dismantle the “convertibility” shackles that have constrained the won for nearly three decades, propelling the currency from restricted status toward full convertibility.<\/p>\n
This ambitious roadmap signals a fundamental strategic shift in South Korea’s foreign exchange policy from defensive “risk prevention” to proactive “international expansion.” The central pillar is the establishment of an offshore won settlement system. Under the plan, foreign investors will be able to hold and settle in won directly through designated overseas financial institutions, completely eliminating the cumbersome historical requirement of opening a bank account within South Korea. For example, a New York-based investor could obtain won and complete a transaction through a financial institution registered with local regulators during U.S. trading hours, without waiting for South Korean banks to open.<\/p>\n
Lee Hyung-ryul, Deputy Director-General of the International Finance Bureau at South Korea’s Ministry of Economy and Finance, stated at a press briefing that the offshore settlement mechanism will adopt a more open “registration system” rather than a strict “licensing system.” The system is scheduled to begin pilot operations this September, with a full official launch planned for January next year. It will be operated by the Bank of Korea, complementing the near-24-hour foreign exchange market that South Korea recently introduced.<\/p>\n
Beyond restructuring the physical settlement infrastructure, the government also plans to ease transaction rules for foreign capital. Under the Foreign Exchange Transactions Act, the pre-reporting threshold for won-denominated capital transactions will be more than doubled. For transactions assessed as posing no significant risk to financial stability, investors may even submit post-transaction reports. Meanwhile, to encourage the use of the won in cross-border trade, the government is considering offering preferential policy financing rates for trade transactions settled in won.<\/p>\n
To deepen the stickiness of won-denominated assets in overseas markets, the roadmap also lays tracks connecting to core international financial infrastructure. South Korea will allow foreign investors to conduct securities lending of South Korean government bonds and monetary stabilization bonds through international central securities depositories (ICSDs) such as Euroclear and Clearstream, the latter owned by Deutsche B\u00f6rse Group. Additionally, access channels for foreign central banks and international institutions to the interbank repo market will be broadened, and non-residents will be permitted to invest idle won holdings in short-term financial instruments.<\/p>\n
Behind this flurry of decisive measures lies a long-standing predicament for South Korea’s capital markets. Despite ranking among the world’s top economies, the won’s international standing has consistently lagged. According to Bank for International Settlements (BIS) data, as of April 2025, the won accounted for only 1.8% of global foreign exchange turnover, down from 2% in 2019. This lag largely stems from policy scars left by the 1997 and 2008 financial crises. Under the strict regulatory framework, foreign investors holding won were required to go through domestic South Korean banks, and all cross-border capital transactions were subject to reporting requirements, leading international capital to long view the won as a “restricted asset.”<\/p>\n
Lee Hyung-ryul described the reform as the “biggest turning point” since 1997. “For a long time, South Korea’s foreign exchange policy was primarily focused on preventing another currency crisis. Won internationalization means the policy focus is shifting,” he said. “We aim to capture long-term benefits, including boosting potential economic growth rates, by expanding the won’s global usage.” Heo Chang, South Korea’s Second Vice Finance Minister, also emphasized that this is a critical task for elevating the country’s foreign exchange and financial markets to a higher stage.<\/p>\n
The immediate trigger for the reform was MSCI’s recently announced 2026 annual market classification review. South Korean equities were once again excluded from the developed-market index watchlist, with MSCI explicitly citing the inability to freely settle and deliver won offshore, along with insufficient overnight foreign exchange market liquidity, as key obstacles to an upgrade. Currently, offshore won trading relies primarily on non-deliverable forwards (NDFs), a model that settles only price differences without principal delivery. This forces global asset managers allocating to South Korean stocks or bonds to navigate complex currency conversion processes and constrained funding timelines. The government hopes to clear these technical hurdles by establishing offshore physical accounts and a 24-hour settlement network.<\/p>\n
Notably, South Korea’s decision to push forward at this juncture is not a rash gamble but is grounded in a fundamental structural improvement in its economic fundamentals. Compared to the crisis era, South Korea has transformed from a net debtor to a net creditor nation, with a net international investment position (NIIP) of $369.9 billion in 2025. As of the end of June this year, South Korea’s foreign exchange reserves stood at $427.36 billion, and the current account surplus for the first five months of the year surged to $141.28 billion, with robust semiconductor exports generating ample foreign exchange earnings. Koo Yun-cheol, South Korea’s Deputy Prime Minister and Minister of Economy and Finance, noted that 24-hour foreign exchange trading is a crucial starting point for the won’s globalization and a key link in the effort to secure inclusion in the MSCI Developed Market Index.<\/p>\n
However, once the door to openness is unlocked, the risk of volatile cross-border capital flows inevitably follows. As foreign holdings of won-denominated assets expand, turbulence in international financial markets could transmit more rapidly to South Korea’s domestic market. Lee Hyung-ryul acknowledged that expanding foreign holdings of won assets could indeed increase market volatility, but he argued that the long-term economic benefits of won internationalization would outweigh the potential risks. To build firewalls, the government plans to expand its bilateral currency swap network, strengthen monitoring of the offshore won market, and have the Ministry of Economy and Finance and the Bank of Korea jointly monitor overnight foreign exchange trading, with a focus on divergences between onshore and offshore won exchange rates.<\/p>\n
Market participants and academics hold differing views on this reform path. Park Sun-young, an economics professor at Dongguk University in South Korea, believes that deeper markets create stronger buffers against volatility. However, Kim Jung-sik, professor emeritus of economics at Yonsei University, pointed out the inherent dilemma: “The choice now is between enduring foreign exchange market instability to advance won internationalization, or slowing down the MSCI upgrade benefits for the sake of stability. The government must design policies that advance reform without amplifying exchange rate volatility.”<\/p>\n
With the roadmap’s implementation, South Korea is attempting to find a new equilibrium between capital openness and financial security. This transformation, which begins in the foreign exchange market, concerns not just an MSCI rating, but will profoundly shape the global competitiveness of South Korea’s financial markets for decades to come.<\/p>\n","protected":false},"excerpt":{"rendered":"After South Korea’s stock market was shut out of MSCI’s developed-market watchlist for the 12th consecutive year, the…\n","protected":false},"author":2,"featured_media":92847,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[456],"tags":[48743,845,846,48745,48744,48742,48746,15396,5861,335,26782,10888,41813,42518],"class_list":["post-92846","post","type-post","status-publish","format-standard","has-post-thumbnail","category-bank-of-korea","tag-bank-for-international-settlements-bis","tag-bank-of-korea","tag-bok","tag-clearstream","tag-euroclear","tag-ftse-world-government-bond-index-wgbi","tag-heo-chang","tag-koo-yun-cheol","tag-korean-won","tag-kospi","tag-lee-hyung-ryul","tag-msci","tag-offshore-won-settlement-system","tag-south-koreas-ministry-of-economy-and-finance"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/92846","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/comments?post=92846"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/92846\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media\/92847"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media?parent=92846"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/categories?post=92846"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/tags?post=92846"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}