The won-yuan exchange rate surpassed 202 won for the first time since the establishment of the won-yuan direct trading market in 2014, recording an all-time high on the 24th. Amid a decline in the value of the yuan due to conflicts with the United States and sluggish real estate markets, attention is turning to the fact that the value of the won has fallen even more sharply.
◇ Won-yuan exchange rate closes at 202.41... Highest since direct trading began
According to Seoul Foreign Exchange Brokerage on the 25th, the won-yuan exchange rate closed at 202.41 won, up 0.71 won from the previous trading day on the 24th. This is the highest rate since the direct trading market opened in December 2014. The previous highest was 201.52 won on Oct. 6, 2022. At that time, the won-yuan exchange rate surged due to instability in the corporate bond market following the Lego Land debt default incident.
The won-yuan exchange rate has been on the rise since it broke the 200 won mark on Dec. 27 last year (200.19 won). Although it briefly fell below 200 won in February this year, it surged past 200 won again ahead of the Constitutional Court's ruling regarding President Yoon Suk-yeol, displaying sharp volatility. Notably, in March, the exchange rate exceeded 200 won on all trading days except for four (the 4th, 7th, 10th, and 19th), sustaining a high exchange rate trend.
This trend is unusual because the yuan is experiencing historic weakness. Last year, the retail sales growth rate in China was only 3.5%, half of what it was a year earlier (7.2%), which increased downward pressure on the yuan. This year, the value of the yuan further declined after former U.S. President Donald Trump imposed an additional 20% tariff on Chinese imports in January.
In fact, the dollar-yuan exchange rate exceeded 7.33 yuan ahead of Trump's inauguration in January and reached its highest level since September 2023. The dollar-yuan exchange rate has only exceeded 7.30 yuan twice since China adopted a floating exchange rate system in July 2008 (October 2022, September 2023). In October 2022, the yuan weakened due to the Federal Reserve's steep interest rate hikes, and in September 2023, it was due to a sluggish real estate market. Although this month it has come down to around 7.25 yuan, it remains higher than the early November of last year (around 7.17 yuan) before Trump's election.
Park Sang-hyun, a researcher at iM Securities, noted, "The yuan is showing weakness linked to concerns over China's economic fundamentals and a global strong dollar trend," adding, "However, the won is showing even more weakness, leading to greater volatility."
◇ U.S. tariffs and China's manufacturing rise... Downward pressure on the won increases
In the foreign exchange market, various analyses are emerging regarding the backdrop of the won's value falling even more than the weakening yuan. First, it is noted that Korea is not free from U.S. tariff policies. Former President Trump previously announced that on the 2nd of next month, he would impose reciprocal tariffs on major trading countries, including allied nations. Since Korea runs a significant trade surplus with the U.S., it is likely to be directly affected, exerting downward pressure on the won's value.
The second factor is the rise of Chinese manufacturing. Since 2015, China has been promoting its "Made in China 2025" policy, intensifying the digital transformation of its manufacturing sector. As a result, China has successfully localized industries such as ▲ aerospace ▲ semiconductors ▲ marine technology ▲ new materials and has evolved to the stage of producing intermediate goods that were previously reliant on imports. This has had a negative impact on the Korean economy, which exported intermediate goods to China, causing a decline in the value of the won.
The third factor cited is the deepening of domestic political uncertainties. Due to the Constitutional Court's ruling regarding President Yoon Suk-yeol and the possibility of a snap election, domestic politics has become unstable, leading to a decline in investment sentiment, which is thought to exacerbate the weakness of the won. Lee Chang-yong, the Bank of Korea governor, explained at a press briefing held right after the Monetary Policy Committee on the 1st of last month, "If the recent rise in the won-dollar exchange rate is 70 won, about 30 won is due to political risk."
Kim Chan-hee, a researcher at Shinhan Investment Corp., stated, "While the yuan is not significantly deviating from global currency flows, the won is showing even more weakness due to compounded political uncertainties and tariff issues," adding, "The lack of Korean competitiveness in sectors such as information technology and the persistent low growth trend due to population decline are also factors for the won’s weakness."
Park Sang-hyun, a researcher at iM Securities, stated, "If the upward trend in the won-yuan exchange rate continues, there is a possibility that the Korean economy may completely fall behind China in the medium to long term," emphasizing that aggressive policies are needed to dispel concerns about domestic sluggishness, such as quickly preparing a supplementary budget and fostering advanced industries.