The International Monetary Fund’s decision earlier this week to add the Chinese currency to its reserve currency basket is expected to benefit Korea in the long term, but it poses policy challenges to Korea’s financial authorities.

The IMF has agreed to give the yuan a weighting of 10.92 percent in the basket of currencies that make up the Special Drawing Rights, making it the world’s third-biggest reserve currency following the dollar and euro.

The decision is a momentous event for China. It is an international recognition of the economic importance and power of China, which is still a developing country. More importantly, it is expected to accelerate China’s reform efforts.

China is expected to further open its financial markets by gradually pursuing capital account liberalization and building a more flexible foreign exchange regime.

Market analysts forecast that these reform efforts could lead to capital inflows of as much as $3 trillion over the medium-to-long term. These huge inflows will help China buttress its economy, which is losing growth momentum. This will ultimately benefit Korea, as China is its largest trading partner.

The yuan’s inclusion in the SDR basket is also expected to give momentum to Korea’s plan to create an offshore yuan center. Korea is not as competitive as Hong Kong, London or Singapore as a financial hub. But it has strengths as an offshore yuan center.

Korea is China’s third-largest trading partner, with the volume of annual bilateral trade reaching $300 billion. Furthermore, Korea enjoys a trade surplus of around $60 billion a year, which means it can secure yuan liquidity without difficulty.

To become an offshore yuan center, Korea first needs to encourage its companies trading with China to settle trade with the renminbi. Currently, more than 95 percent of Korean companies’ trade with China is settled in dollars.

Companies can reduce transaction costs when they settle trade with the yuan directly, bypassing the dollar. This will also make them less vulnerable to fluctuations in the value of the greenback.

To encourage the use of the renminbi, the government opened a direct won-yuan market in Seoul in December 2014. Direct transactions between the two currencies, however, remain at around $2.2 billion a day, about a quarter of the daily won-dollar trading volume.

In the second quarter of next year, Korea plans to open a direct won-yuan market in Shanghai to allow Korean companies operating in China to settle transactions more conveniently and cheaply.

The market will be the first offshore market where the Korean won is traded directly between nonresidents. Once offshore direct trading of the Korean won is allowed, the foreign exchange market could be disrupted by offshore currency speculators who seek to take advantage of the interest rate disparities between Korea and offshore markets. This means foreign exchange authorities would need to step up their monitoring of the currency markets.

Yet it is inevitable for Korea to promote the liberalization of its own currency if it intends to take advantage of the yuan’s ascendance as a global reserve currency. The won’s internationalization is also necessary to make the Korean capital market more accessible to foreign investors.

To create a yuan center differentiated from existing ones, domestic financial institutions also need to develop yuan-based services useful to Korean traders and create diverse financial products where Korean exporters can park their yuan liquidity.