Bilateral swap agreements offer path to increase international use of the yuan
With the China-South Korea currency swap agreement scheduled to expire on Tuesday, it seems uncertain whether the deal will be extended given ongoing bilateral political tensions.
Bank of Korea Governor Lee Ju-yeol told reporters on Tuesday that expiration of the swap deal is not all that important as talks continue on the issue, according to a Reuters report. “It will be great if things can be concluded before the expiration but that is not always the case,” Lee said. China and South Korea signed a currency swap agreement worth 360 billion yuan ($56 billion) or 64 trillion won ($55 billion) in April 2009, and extended the deal for another three years in October 2014. A currency swap is an arrangement that allows a country to borrow currency from others when foreign currencies are urgently needed, such as in times of a financial crisis.
While the swap provisions have never been used because both countries have sufficient foreign exchange reserves, the swap pact with China is more than just a symbol of financial cooperation for South Korea. South Korea failed to extend currency swaps with the US and Japan, which expired in 2010 and 2015, respectively. It won’t look good for the country to have no currency swap with a major economy if it cannot extend the deal with China this time. Moreover, the swap with China accounts for 45.8 percent of the total swap deals South Korea has with other economies. Therefore, failure to extend the swap with China will surely have a negative impact on South Korea’s foreignexchange market stability.
As for China, in addition to solving short-term liquidity problems, currency-swap deals have also created conditions for the yuan’s internationalization push. So far, China’s central bank has signed swap deals with more than 30 countries and regions, worth at least 3 trillion yuan.
Before the yuan becomes fully convertible, an extensive network of such agreements can inject yuan liquidity into overseas markets and improve yuan-denominated trade activities in the short and medium term.
To revive hopes for a renewal of the currency swap, observers say it’s necessary for South Korea to make more effort.