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South Korea said it agreed with China to allow banks in both countries to borrow funds from an existing swap arrangement to encourage trade settlement in local currencies.
A 64 trillion won ($59 billion) swap line will be made available for loans to allow companies in both countries to settle deals in the won and yuan, according to a statement today from the Finance Ministry and the Bank of Korea. The system is scheduled to start later this month, it said.
The agreement is part of a push among emerging countries to internationalize local currencies after the global financial crisis, according to the South Korea statement. Both China and South Korea acknowledge that the use of the won and yuan is “very low” even as trade between the two countries is increasing, it said.
“We expect several benefits, such as reduced foreign- exchange risk and transaction costs for companies,” according to the statement. Alleviating “external vulnerabilities due to decreased dependence on the major reserve currencies” is also a reason for pursuing the deal, it said.
The won was little changed at 1,083.45 per dollar at the close today in Seoul, according to data compiled by Bloomberg. The Kospi index of stocks fell 0.3 percent.
China is South Korea’s biggest trading partner with two-way trade rising to $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.
The strategy of promoting the won though an existing swap line may not be very fruitful as China also wants the yuan used more, said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.
“Korea needs to market its currency vis-à-vis a number of major trading partners,” she said.
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