The won is the currency of South Korea. It’s also one of the world’s most inflated currencies, with a massive amount of cash locked away in savings. There are many possible reasons for this, but probably the biggest factor is simply a distrust of digital and mobile payments. In fact, many Koreans are so distrustful of digital payments that they keep their entire life savings in their sock drawer. This article looks at why The Won is so inflated and what it means for you as an investor.
Why Is The Won So Inflated?
1. China’s capital controls
Capital controls have been the best supporting reason for an overvalued won. These controls have stopped capital outflows from China, which, in turn, has reduced the supply of won in the market. The Chinese government has put in place certain restrictions on dollar outflows from Chinese corporations and individuals to protect its own currency from a stronger dollar and also from a stronger won. This has resulted in a significant inflow of Chinese money into South Korea, pushing up the value of the won. The won has received a lift in part because it’s been a cheaper place to put money than other Asian currencies, with lower interest rates, or the U.S. dollar, with higher rates.
2. Don’t forget about the Bank of Korea’s QE program
The Bank of Korea (BOK) has been following a QE program since 2016, injecting liquidity into the South Korean economy by purchasing government bonds and equities. The BOK bought around $38.6 billion worth of equities and $42.7 billion worth of bonds, which helped drive up equity prices in South Korea. The BOK has been easing its policy since 2016 and has kept its interest rate at a record low of 1.5%. The BOK has also been engaging in quantitative easing (QE) in order to pump liquidity into the South Korean economy and to keep interest rates low. The BOK has been purchasing government bonds and equities from South Korean companies, which has pushed up equity prices in the country and caused the won to weaken against the dollar.
3. Korean Exports
A lot of goods are sold in dollars, and a depreciating currency makes these goods more expensive for importers. A higher win might make these exports less competitive, which would hurt South Korea’s export-led economy, which has been an important driver of growth in recent years. The won has gained around 20% against the dollar since the beginning of 2018 and this could be a bad sign for South Korea’s exports, which are priced in won. The South Korean won has appreciated significantly against the dollar this year, making South Korean exports less competitive in the global market. The strong win has also affected South Korean stocks, as many companies have their earnings denominated in dollars. This means that their earnings will be lower if the won appreciates.
4. Korean Securities and Exchange Commission (KRSE) interventions
The KRSE has intervened a couple of times to support equity markets. The equity markets have generally been doing well this year, but they have fallen recently as the dollar has been strengthening. The KRSE has purchased equities through open-ended funds to support equity markets. It has also been intervening in the forex market to keep the won’s value in check. The KRSE uses open-ended funds to purchase equities when they fall below a certain threshold. The KRSE has also been buying dollars via open-ended funds to keep the won in check.
5. The inherent value of Korean equities
The KRSE has been outperforming the rest of the world since the beginning of the year. This is one of the reasons why the won has gained so much against other currencies. The KRSE is up around 19% since the beginning of the year as compared to the S&P 500 index, which is part of an equity index. This gain has given the won an inherent value that is higher than that of other currencies. Another factor that is driving up the win is the expectation of a stronger U.S. dollar. The U.S. dollar generally gains strength in anticipation of a rate hike from the Federal Reserve.
How Korean Culture And Confidence In Cash?
- This is the problem with the won: it’s not very liquid. In fact, many Koreans keep their entire life savings in cash. Why? Because it’s easy and safe to store your money in a bank account, but hard and risky to keep your money in cash. This is a great example of how culture can influence confidence in a currency.
- In Korea, everyone knows that their banks are extremely safe and will never run out of money, so they don’t need that much cash on hand. So why not put some of your savings away? It’s also worth noting that there are no ATM fees or other transaction charges associated with using a bank account in Korea—a big difference from other countries where you have to pay an extra fee every time you use your card. In short, people in Korea know that their money is safe in a bank, and they have no reason to keep it all in cash.
- If you’ve ever been to Korea, you’ll have noticed that there’s almost no one paying with a credit card. This is mostly because Koreans don’t really trust credit cards. You can’t really blame them either; credit cards are very new to them. Credit cards only became popular in Korea in the mid-2000s and only really gained trust in the last few years. In fact, Koreans often rely on debit cards more than credit cards. Unlike credit cards, debit cards are not backed by a promise to pay. In fact, Koreans also don’t really trust banks. This is part of the reason for the huge cash reserves in The Won.
- In fact, many people keep their entire life savings in cash. This is simply because they don’t trust banks not to lose it. Koreans have a deep-rooted distrust of financial institutions, stemming from the Asian Financial Crisis that occurred in the late nineties. This distrust is especially prevalent among the older generation. Nowadays, banks in South Korea are much more trustworthy than they used to be. Even so, many Koreans still prefer to keep their savings in cash. This is because they simply don’t trust banks with their money.
- They might be worried that banks could lose their money. It could be that they simply prefer to keep their money in cash. They might think that investing in stocks is too risky. They might even think that the stock market doesn’t exist in Korea. Whatever the reason, this huge cash reserve has inflated the value of The Won.
Why Koreans Don’t Trust Digital Payments?
- The Won’s inflation is a result of Koreans’ distrust of the financial system. In the past, Koreans were absolutely sure that their money was safe in banks. But in 2007, a few banks collapsed because they had invested too much money in real estate and other risky projects. This caused many Koreans to lose faith in their banks.
- They began to think that they could lose all their savings in the event of another banking crisis. Because they didn’t trust banks, they began to hoard as much cash as possible, so that they would have something to fall back on if things went wrong again. As a result, Korea has had one of the largest cash reserves among all countries for years now—the country has been holding The Won at an average rate of about ten percent for over a decade! The Won is now worth about 30% more than it was worth ten years ago—that’s a huge rise!
- Koreans also believe that the best time to invest your money is between July and August (the hottest month of summer) because then the crops are ready for harvest. This means that farmers will have a good income and will be able to spend all of their savings in September and October.
- If a farmer saves his money during this time, he can use it for things like buying houses, cars, or building materials for his new house—he has plenty of opportunities to spend his hard-earned cash during this time! This is why many people put their cash into stocks around the end of July (called “stock farming”). They get it out of their bank accounts at exactly 1:00 PM on August 1st and place it at investment companies or stock markets around Korea so they can be sure not to lose any money!
What Strategies To Take Advantage Of The Won’s Inflation?
- If you have a business that trades in The Won, then you’re very likely to benefit from the won’s inflation. This is because your sales are worth more when converted to USD. So if you’re running a business that trades in The Won, then there’s a very good chance that you’re benefiting from the won’s inflation.
- This is probably a good thing. If you’re an investor, then you can also benefit from The Won’s inflation. This is because The Won’s inflation has made it much more valuable than the dollar, making it a great place to invest.
- In fact, The Won has now become one of the most inflated currencies in the world. There are many ways to take advantage of The Won’s inflation. One way is to invest in stocks. As we’ve already discussed, many Koreans don’t trust stocks. This means that many stocks are undervalued.
- This also means that there is significant room for growth. Another option is to invest in cryptocurrencies. Many cryptocurrencies are very volatile. This means that they have a high chance of increasing significantly in value. These are all great ways to take advantage of The Won’s inflation.
Bottom Line
The won is the currency of South Korea. It’s also one of the world’s most inflated currencies, with a massive amount of cash locked away in savings. There are many possible reasons for this, but probably the biggest factor is simply a distrust of digital and mobile payments. In fact, many Koreans are so distrustful of digital payments that they keep their entire life savings in their sock drawer. This article looks at why The Won is so inflated and what it means for you as an investor.
