South Korean foreign exchange authorities took unconventional measures: absorbing the repatriation of US dollars from SK Hynix to stabilize the exchange rate.

South Korean foreign exchange authorities are using an unconventional operation to absorb most of the US dollar funds repatriated to South Korea after SK Hynix's listing in the US.

On September 2, Reuters, citing sources familiar with the matter, reported that the Korea Exchange Stabilization Fund purchased approximately $20 billion in funds repatriated to South Korea by SK Hynix after completing its $26.5 billion American Depositary Receipts (ADR) issuance through an over-the-counter transaction.

This operation differs from the South Korean authorities' previous intervention methods, which involved buying and selling foreign exchange in the open market. The report, citing sources familiar with the matter, stated that the South Korean Foreign Exchange Stabilization Fund's move aims to stabilize the foreign exchange market and replenish the dollar assets depleted by previous large-scale interventions.

The timing of this capital repatriation is also quite crucial. The Korean won has recently rebounded significantly from its previous weakness, appreciating by more than 12% in the past two months; at the same time, the size of the Korea Exchange Stabilization Fund is expected to decrease, making this takeover of a large amount of US dollar funds from SK Hynix even more noteworthy to the market.

Off-exchange absorption of $20 billion to replenish the dollar assets of the Foreign Exchange Stabilization Fund

This transaction was executed by the Foreign Exchange Stabilization Fund, jointly managed by the South Korean Ministry of Finance and the Bank of Korea, and completed through off-exchange channels rather than directly entering the open market. The report notes that while it was already widely known that SK Hynix would repatriate the US dollars raised from its ADR issuance to South Korea, this report reveals for the first time the identity of the main buyer of these funds.

The Foreign Exchange Stabilization Fund is a pool of funds used by the South Korean government to stabilize the foreign exchange market. Its assets consist solely of US dollars and Korean won, but the South Korean government does not publicly disclose its specific asset structure or current size. Due to the Bank of Korea's previous continuous intervention in the foreign exchange market, market participants and macroeconomists have long believed that the fund's US dollar assets may have declined significantly. Therefore, the recent absorption of approximately US$20 billion is seen as an important operation to replenish its US dollar positions.

The Foreign Exchange Stabilization Fund was originally set at 135.1 trillion won, according to an operating plan approved by the South Korean National Assembly last year. A draft budget released by the South Korean government on Tuesday indicates that the fund's size is expected to decrease to approximately 106.5 trillion won.

SK Hynix completed a $26.5 billion ADR offering in July, the largest stock offering by a foreign issuer in the U.S. market to date. The company stated that the funds raised will be used to build new factories and purchase equipment to meet the rapidly growing demand for artificial intelligence chips.

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