Will Korea, China extend currency swap?
Bank of Korea (BOK) Governor Lee Ju-yeol is holding a meeting with his Chinese counterpart Zhou Xiaochuan and Japanese counterpart Haruhiko Kuroda today to discuss diverse economic and financial issues focusing on macro leverage. Extending the currency swap between Korea and China, however, is not included in the agenda.
According to the BOK, the central bank chiefs of the three East Asian countries will meet in Songdo International Business District in Incheon. They have been holding annual meetings since 2009 to enhance mutual understanding and cooperation while stabilizing the region’s economy.
“The currency swap is not included in the agenda since it is not of common interest for all three countries,” said an official in charge of international financial cooperation at the central bank. He explained only issues pertaining to all three countries will be discussed at the meeting, which excludes the won-yuan currency swap.
Korea and China signed the won-yuan currency swap deal in April 2009. This kind of deal helps a country protect itself against foreign exchange crises as it can borrow the foreign exchange by providing its own currency. Korea has been actively signing currency swap deals with other countries though a massive outflow of capital it saw during the 1997 Asian financial crisis isn’t likely when considering its ample foreign exchange reserves.
The deal with China is scheduled to expire on Oct. 10 following two extensions so far. Korea has been expressing its hope to extend the 360 billion yuan ($56 billion) swap deal with China.
“We plan to extend it after discussing with China,” Strategy and Finance Minister Kim Dong-yeon told reporters in a recent press meeting.
It accounts for a significant portion of Korea’s currency swap deals which total $122 billion. Korea extended a 9 trillion won deal with Australia and 5 trillion won deal with Malaysia earlier this year.
However, there have been con- cerns China may not extend it since it has been taking economic retaliation on Korea following deployment of the U.S. Terminal High Altitude Area Defense (THAAD) missile defense system on Korean soil to guard itself against North Korea’s threats. China has been claiming the U.S. military equipment in the neighboring country undermines its security.
China had agreed at a G20 meeting in April last year that the deal should be extended in principle. Since the conflict over THAAD has intensified since the end of last year, China has been skirting the issue.
Korea had signed a $70 billion currency swap deal with Japan following the global financial crisis, but it also hasn’t been extended since February 2015 due to diplomatic conflicts. Japan has been taking issue over Korea’s statues commemorating wartime sexual slavery victims.
The BOK noted the central bankers will exchange their ideas on economic and financial situations at the meeting on Songdo, especially focusing on the debts of households, businesses and the government. Korea is suffering record-high household debt while corporate debt is a problem for China, and Japan’s biggest concern is government debt.