Extended Currency Swap with China Following the US... A Safety Net for the Foreign Exchange Market

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] South Korea and China have agreed to extend their currency swap agreement. Following the extension of the currency swap agreement with the United States, the decision to extend the currency swap agreement with China is seen as providing a solid safety net for the foreign exchange market.

The Bank of Korea announced on the 8th that it had agreed to extend the Korea-China currency swap agreement signed with the People's Bank of China. The Korea-China currency swap agreement, signed in October 2017, is set to expire on the 10th. The scale of the Korea-China currency swap agreement signed in 2017 was $56 billion (approximately 64 trillion KRW), making it the second largest currency swap agreement South Korea has signed, following the United States ($60 billion). The extended currency swap agreement is expected to maintain the previous amount of approximately $56 billion.

In 2017, there were difficulties renewing the currency swap agreement due to conflicts surrounding THAAD (Terminal High Altitude Area Defense), but this year, the renewal process was relatively smooth due to the friendly atmosphere between South Korea and China.

The Bank of Korea stated, "We have reached a practical agreement to extend the currency swap contract, and the specific details will be announced once the procedures are finalized."

A currency swap is a foreign exchange transaction in which different currencies are exchanged at a predetermined exchange rate at a certain point in time. It is a contract that allows countries to deposit their own currency and borrow the other party's currency at a pre-agreed exchange rate in case of emergency. It serves as a safety net in the foreign exchange market when foreign currency funding is urgently needed.

In addition to the United States and China, South Korea has currency swap agreements totaling approximately $193.2 billion with eight countries, including Canada (no pre-set limit), Switzerland (approximately $10.6 billion), and Australia (approximately $8.1 billion).

The Bank of Korea extended its current currency swap agreement with the U.S. Federal Reserve (Fed) on July 30. Earlier, on March 19, the Bank of Korea and the Fed signed a $60 billion currency swap agreement. At that time, during the early spread of COVID-19, a global dollar shortage occurred, but the market calmed down as the Fed signed large-scale currency swap agreements with major countries worldwide. With the extension of the currency swap agreement with the Fed in July, the contract expiration date was postponed from September 30 of this year to March 31 of next year.

Meanwhile, the Korea-Japan currency swap has been effectively suspended due to diplomatic conflicts between the two countries over issues such as Dokdo and comfort women. The Korea-Japan currency swap agreement was signed in 2001 with a maximum scale of $70 billion, but after relations deteriorated following former President Lee Myung-bak's visit to Dokdo in August 2012, the agreement was not renewed and expired in 2015. Subsequently, in August 2016, South Korea proposed a currency swap to the Japanese government citing Brexit and U.S. interest rate hikes, but in January 2017, the Japanese government unilaterally announced the suspension of negotiations, citing the establishment of the comfort women statue in front of the Japanese Consulate General in Busan.

This content was produced with the assistance of AI translation services.