1. The recent rise in global trade protectionism has increased uncertainty regarding the future path of the Chinese yuan (CNY), thereby drawing greater attention to the effects of CNY movements on the Korean won (KRW). Against this backdrop, this paper investigates the background and stylized facts of the synchronization between the KRW and the CNY. Based on empirical analysis, it documents the key characteristics of this co-movement across countries, over time, and under different exchange rate regimes, and derives relevant implications.
2. The KRW and CNY have exhibited a consistently high degree of co-movement, although the strength of this correlation has fluctuated over time. The correlation coefficient rose markedly during several key periods: the U.S.-China trade tensions under the first Trump administration (April 2018-September 2019), the Federal Reserve’s rate hike cycle (February 2022-April 2023), and the period following Trump’s second election victory in October 2024. This pronounced synchronization appears to be driven by structural factors, including the dominant role of the U.S. dollar (USD), Korea’s close economic linkages with China, and prevailing practices in the foreign exchange market.
3. On a cross-country basis, the KRW records the highest co-movement coefficient with CNY among 33 currencies. This strong association reflects Korea’s intensive trade and financial linkages with China, suggesting that the pronounced synchronization largely driven by the close economic ties between the two countries.
4. On a cross-period basis, the co-movement between the KRW and the CNY has weakened structurally since 2020. This decline appears to have been driven by reduced trade between Korea and China, stemming from the U.S.-China trade tensions of 2018-2019 and the reconfiguration of global supply chains following the COVID-19 pandemic in 2020. The co-movement coefficient has remained below its long-term average since 2024, but has recently begun to rise toward that level. This rebound may reflect the effects of heightened trade protectionism under Trump’s second term, which amplified trade shocks affecting both Korea and China given their heavy export dependence on the U.S.
5. On a cross-regime basis, the KRW exhibits asymmetric co-movement with the CNY, displaying stronger synchronization during depreciation regimes and weaker synchronization during appreciation regimes. This asymmetry is mainly attributable to the simultaneous weakening of both currencies against the USD, competition between Korea and China in global export markets, and Korea’s floating exchange rate system. Moreover, coupling regimes have tended to persist longer than decoupling regimes, with the period since December 2023 identified as a synchronized phase.
6. Considering the key characteristics of KRW-CNY synchronization examined in this paper and the increased uncertainty surrounding the outlook for CNY, KRW is likely to be influenced by movements in CNY. In light of these considerations, it is necessary to continuously monitor the trajectory of CNY while paying close attention to developments in the U.S.-China trade tensions.