China, South Korea to boost local currency usage under trade pact

Want China Times, Lin Tien-wei and Staff Reporter 2012-12-06

A ad for renminbi services on a street of Hong Kong. (File photo/CNS)

South Korea's central bank said on Dec. 4 that it will enter a 360 billion yuan (US$59 billion) currency swap agreement with its Chinese counterpart in mid-December. This will support trade currency settlements made by local companies in each country by using a yuan-won swap line.

This move is expected to boost bilateral trade between China and South Korea and promote the globalization of the renminbi.

South Korea's Seoul-based Yonhap News Agency reported that the central banks of the two countries will each open an account in the other country's central bank and deposit their local currency into a lending account. The renminbi deposits made by South Korea in China's central bank will be lent to Korean importers through the Bank of Korea for payments due to China's export enterprises. Likewise, Chinese firms can also obtain renminbi-denominated loans when exporting to South Korea.

In other words, under the agreement, South Korean firms will be able to borrow renminbi-denominated funds for trade settlements from local banks, and the BOK will lend renminbi-denominated funds secured under the currency swap line with the People's Bank of China.

If the currency swap agreement is implemented smoothly, it will encourage renminbi and won usage in bilateral trade. "We plan to arrange similar agreements with Japan and other Asian countries after this," a BOK official said.

The report said that South Korea's central bank planned on selecting lending banks to have them sign agreements related to foreign exchange loans. This would also impose restrictions on loan quotas.

To help decrease an over-reliance on the US dollar, China has aggressively promoted cross-border trade settlements using the renminbi and has signed currency swap agreements with several countries to improve the usage volume for the currency, the report said.

It added that the move would also help reduce companies' exposure to currency risks and transaction costs, as well as ease external vulnerability by decreasing a reliance on major reserve currencies.

China is South Korea's largest foreign trade partner. Last year, bilateral trade between the two countries touched US$245.6 billion, which was an 18.5% growth year-on-year. About 25% of South Korea's exports were targeted at China. Amidst growing bilateral trade, only 3% of the transactions were settled using the renminbi or the won, while most were settled using the US dollar. The currency swap agreement was signed in 2011 during a visit to Seoul by China's vice premier Li Keqiang.

While the two countries have agreed to adopt the existing currency swap to boost the use of local currencies in bilateral trade settlements, Taiwan is the only economy among Asia's Four Little Dragons that has not signed a currency swap agreement with China yet. This could mount pricing pressure on Taiwanese companies exporting to China.

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