Bloomberg News

South Korea Boosts China Currency Swap in Three-Year Deal

October 26, 2011

(Updates with length of deal in second paragraph.)

Oct. 26 (Bloomberg) -- South Korea secured its second currency-swap agreement in a week to shield the nation from any fallout from Europe’s debt crisis and the global slowdown.

South Korea and China will almost double their won-yuan swap line to 64 trillion won ($56.5 billion) from 38 trillion won, the Bank of Korea said in a statement in Seoul today. The three-year deal will expire on Oct. 25, 2014.

The agreement, together with a similar deal signed with Japan on Oct. 19, offers Asia’s fourth-largest economy protection from funding shocks as Europe’s sovereign-debt crisis deepens and demand in South Korea’s largest export markets slows. The won has weakened 7.1 percent against the dollar over the past three months, the second-worst performer in Asia.

“South Korea is enhancing its safety net in a preemptive measure to avert a liquidity crisis, which should limit the volatility of the won,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc., Japan’s largest brokerage. “Like a similar deal with Japan, this deal is mutually beneficial as neither Japan nor China wants a weak won as they have to compete with South Korean exporters both at home and abroad.”

The won fell 0.3 percent to 1,132.45 per dollar at the 3 p.m. market close in Seoul before the announcement.

Easing Global Uncertainties

The agreement was signed during a meeting between Chinese Vice Premier Li Keqiang and South Korean Prime Minister Kim Hwang Sik today in Seoul, according to the statement. The two countries’ central banks also agreed to discuss whether to make their holdings of reserve currencies available for the swap, the Bank of Korea said.

“Today’s measure will help ease the negative impact of increased global financial uncertainties on our well-managed economies that have solid fundamentals, while contributing to the promotion of bilateral trade for our stable economic development,” the Bank of Korea said in the statement.

South Korea last week increased its currency-swap accord with Japan to $70 billion. The deal included a one-year, $30 billion dollar swap line and a won-yen agreement of the same amount.

China Bonds

There is “no change” in that South Korea doesn’t need to use the currency swap lines with China and Japan now, Kim Jae Chun, deputy governor of the Bank of Korea, told reporters in Seoul after the announcement today.

South Korea may use the swap deal to buy Chinese government bonds in the “mid- and long-term” as China opens up its capital market, Kim said.

“It’s important to enhance financial and currency cooperation to preemptively stabilize the financial markets amid escalating global economic uncertainties,” South Korean President Lee Myung Bak said after announcing the swap arrangement with Japan.

Vice Finance Minister Shin Je Yoon told reporters at the time the agreement may help stabilize the foreign-exchange market and that South Korea doesn’t have any plans to tap the credit line.

--Editors: Jarrett Banks, Paul Panckhurst

%USD %CNY %KRW

To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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