2010-12-07 10:02

SEOUL - China increased holdings of South Korean government bonds in November by the most in six months, taking advantage of a retreat in the won.

Net purchases of South Korean Treasury bonds (KTBs) amounted to 556 billion won ($490 million), 27 percent more than in October, according to data released on Monday by South Korea's Financial Supervisory Service. Total holdings increased 9.9 percent to 6.14 trillion won, more than triple the level at the start of 2010. The won's 2.9 percent slide versus the dollar in November marked its biggest decline since May.

"For investors looking at South Korean bonds as a long-term investment, a weaker won gives them the opportunity to buy the bonds at a cheaper cost," said Choi Woon-kon, head of the securities market team at the financial regulator.

The yield on the 3.75 percent South Korean Treasury bond due in June 2013 touched 3.03 percent on Monday, the lowest level since Bloomberg started compiling the data in 2000. China is considering allocating more of its $2.65 trillion foreign-exchange reserves to emerging-market currencies to boost returns, central bank Governor Zhou Xiaochuan said in October. The nation's holdings of US Treasuries fell 1.3 percent in the first nine months of this year to $883.5 billion, and the US Federal Reserve Board's benchmark interest rate of a maximum 0.25 percent compares with 2.5 percent in South Korea.

"Chinese authorities have every incentive to diversify their reserves, and KTBs are a good avenue for this," said Christian Carrillo, head of Asia-Pacific interest-rate strategy at Societe Generale SA. "I estimate net KTB supply will fall next year but Chinese demand could be reasonably stable. So, Chinese demand becomes more important."

South Korean government debt has returned 8.5 percent this year, delivering a profit every month except October, according to an index compiled by HSBC Holdings Plc. US Treasuries have returned 7.8 percent, according to Bank of America Merrill Lynch's Treasury Master Index.

China's holdings of South Korean notes account for about 0.2 percent of its foreign-exchange reserves, which are the world's largest. Overseas investors owned 80 trillion won of South Korean debt at the end of November, 7.2 percent of the country's outstanding bonds, Monday's data showed.

Bloomberg News