Korea, China agree to tap swap line for trade settlement

South Korea’s central bank said Tuesday it has agreed with its Chinese counterpart to use the existing bilateral currency swap line in boosting trade settlement in the two countries’ currencies.

In October of last year, South Korea and China agreed to double their won-yuan swap line to 360 billion yuan ($57.8 billion) in a bid to secure foreign exchange liquidity.

The Bank of Korea said it will lend money to commercial banks by tapping the currency swap and local firms will be able to use the funds in a trade settlement with Chinese firms. The move will take effect starting in mid-December.

“The move will help expand the use of the won and the yuan by facilitating trade settlement and could pave the way for making the existing currency swap line a de facto permanent facility,” the BOK said.

The Korean central bank added that the move would help reduce companies’ exposure to currency risks and transaction costs as well as ease external vulnerability by decreasing reliance on major reserve currencies.

“The move could serve as a stepping stone for further expansion of the Korea-China swap line or make it into a permanent tool,” Eun Ho-sung, head of the BOK’s international financial stability team, told reporters.

He added that the BOK could use the move as a reference for expanding currency swap arrangements with other Asian countries with which Korea has close trading ties.

The move also came as part of Seoul’s efforts to internationalize its currency by reducing heavy reliance on the dollar and better cope with risks from external turmoil.

Following the 2008 global financial crisis, emerging countries have been scurrying to build up a strong financial safety net to prevent offshore financial crises from spreading into the region.

The level of financial cooperation between Korea and China remains in the infant stage, compared with their close relationship in trade. China is South Korea’s No. 1 trading partner and the two nations are in talks over a free trade pact. (Yonhap News)