South Korea in talks to join Citi world bond index

SEOUL, March 27 (Reuters) - South Korea is holding talks with Citigroup Inc. to include its bonds in the investment bank's world index, a move that could potentially attract up to $40 billion in investment to the country.

Many investment funds managing trillions of dollars track Citigroup's World Government Bond Index. If South Korea's bonds are included, funds would buy them to maintain their ability to track the index accurately.

'Both sides have been in close discussion over issues relating to the possible addition of the country into the index, including the economic situation,' said Kim Yi-tae, a department head at the Ministry of Strategy and Finance.

Kim said the government wanted treasury bonds and central bank monetary stabilisation bonds to be included in the index, but he declined to say how long the talks would last.

The Asia Securities Industry and Financial Markets Association estimated South Korea's weighting in the index would be 1.25 percent.

There is some $8 trillion in funds that track the index, of which $2 trillion is passive, suggesting that South Korea's inclusion at a 1.25 percent weighting would draw between $25 billion and $40 billion of investment into the local bond market.

Still, traders and fund managers said joining the index takes time.

'As I understand it, it's quite a long-drawn process to be added to these world indices, six months to a year. That wouldn't be a source of supply in the near term,' said Ken Akintewe, fund manager at Aberdeen Asset Management in Singapore.

South Korea has about 450 trillion won ($337.5 billion) in outstanding treasury and monetary stabilisation bonds and foreign holdings are modest at around 8 percent, data from the Financial Supervisory Service, a regulator, shows.

In contrast, foreign investors are much bigger players in the stock market, owning nearly 30 percent of the market by value.

South Korea said late last month it planned to exempt foreign investors from tax on interest income and capital gains on holdings of treasury bonds and monetary stabilisation bonds to lure more foreign funds.

($1=1333.4 Won)

(Reporting by Yoo Choonsik; Additional reporting by Rafael Nam in HONG KONG; Editing by Neil Fullick)

(([e-mail]; [phone]; Reuters Messaging: [e-mail])) Keywords: KOREA BONDS/CITI (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.