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The Bank of Korea (BOK) and People’s Bank of China (PBC) announced on Oct. 22 that their won-yuan currency swap agreement has been extended for another five years in the amount of 400 billion yuan (US$59.82 billion). Both the amount and duration of the currency swap have been increased from before (US$59.82 billion).

A currency swap system involves two countries entrusting their respective currencies with one another so that they can be borrowed and used. South Korean and China concluded their first won-yuan currency swap agreement in 2009 in the amount of 180 billion yuan (US$26.92 billion). The amount was increased to 360 billion yuan (US$53.84 billion) amid the European debt crisis in 2011, and the two sides agreed to two three-year extensions in 2013 and 2017. With the last contract expiring on Oct. 10, the two sides held discussions in which they agreed to increase the amount of the swap from 360 billion yuan to 400 billion yuan and extend the contract period from three to five years.

The conclusion of a won-yuan currency swap contract can send a positive signal to the foreign exchange market when South Korean supplies of the yuan run low, while providing funds for corporate accounts on both sides through commercial bank loans when they are abundant. A won-dollar currency swap deal concluded in March when the US dollars were globally scarce amid the COVID-19 pandemic resulted in the dollar-won exchange rate falling from 1,285 won on the day before the deal to 1,246 won the following day. Unlike the dollar, the yuan is not a key global currency. It only comprises around 2% of international transactions, so the won-yuan currency swap appears unlikely to impact the domestic foreign exchange market.

BOK announced that the “scale of this won-yuan currency swap joins Hong Kong as the largest currency swap contract China has yet concluded with another country.” It also noted the “significance of the extension of the contract period, which reduces potential uncertainties at the time of expiration and renewal.” China’s currency swap deals with major economies amount to 400 billion yuan each with South Korea and Hong Kong and to 350 billion yuan (US$52.36 billion) with the European Central Bank and the UK. In terms of the scale of South Korea’s currency swap deals with major economies, China (roughly US$59 billion) ranks after Canada (unlimited) and the US (US$60 billion).

“This [deal] is expected to contribute to South Korea’s financial stability at a time of great volatility in international financial markets by ensuring that trade payments can be made in the national currency,” BOK said.

By Shin Da-eun, staff reporter

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