S Korea to use currency swap with China for trade settlement

SEOUL- South Korea's central bank said Tuesday that it will use currency swap agreement with its Chinese counterpart to support trade settlement in the Chinese yuan for local companies.

According to a joint statement by Bank of Korea (BOK) and the Ministry of Strategy and Finance, the BOK agreed with the People' s Bank of China (PBOC) to support trade settlement in each country ' s currency for respective local companies by using the yuan-won swap line.

Under the agreement, South Korean firms will be able to borrow the renminbi funds for trade settlement from local banks, to which the BOK will lend the yuan funds secured under the currency swap line with the PBOC.

The PBOC and the BOK signed an agreement in October last year to extend their currency swap agreement for another three years, doubling the value of the deal to 360 billion yuan, or 64 trillion won ($59 billion).

Meanwhile, the Finance Ministry planned to eliminate regulatory barriers to enable Chinese firms to borrow the won funds from banks there, to which the PBOC lends the won funds secured under the yuan-won swap line. "Despite the rapid expansion in trade between Seoul and Beijing, trade settlement in the yuan and won was not activated enough. This agreement to use the swap line is expected to boost the international usage of both the Chinese yuan and the Korean won,"the central bank and the Finance Ministry said in the joint statement.

The statement noted that active trade settlement in local currencies will reduce currency risks, transactions costs and dependence on reserve currency such as the US dollar, saying that deeper financial cooperation through the swap line may help make the yuan-won swap line permanent.