CHINA and South Korea have agreed on adopting their existing currency swap to boost the use of local currencies in bilateral trade settlement, the Korean Ministry of Strategy and Finance and the Bank of Korea said in a joint statement yesterday.
The Korean central bank said that after consultations with the People's Bank of China it has decided to introduce a facility that will allow Korean companies to settle trade deals in yuan and Chinese firms to settle in won.
The currency swap, valued at 360 billion yuan (US$59 billion), will be lent to trading firms through banks - starting later this month - for settling trade deals.
"The liquidity backing at the central bank level via this trade settlement facility with the Korea-China currency swap proceeds is expected to facilitate the use of both countries' currencies," the Korean central bank said in the statement published on its website.
The regulator said reporting requirements will be waived starting today to ease lending constraints as a result of the revised foreign exchange regulation. Any lending or borrowing in won with the swap proceeds are exempt from reporting to the Korean ministry.
China is South Korea's biggest trading partner with two-way trade rising to US$220.6 billion in 2011, according to a Finance Ministry report in January. About 2 percent of South Korean exports during the third quarter were settled in won and the yuan was used for about 0.2 percent, the Korea Customs Service said in October.
China has been actively promoting the use of yuan in trade settlement since July 2009. From January to October, cross-border yuan settlements totaled 2.5 trillion yuan, out of which 92 percent was for trade settlements. During the same period, about 11.4 percent of China's global trade was settled in yuan, up from 8.4 percent in 2011, Deutsche Bank said in a report.
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