South Korea and China agreed to utilize the existing bilateral currency swap line valued at 64 trillion won ($59 billion or 360 billion Chinese yuan) in boosting trade settlement in the two countries` currencies within this year.
Korea’s Bank of Korea (BOK) and Ministry of Strategy and Finance (MOSF) announced Tuesday that they will put into use the proceeds of the Korea-China swap arrangement to lend respective local trading firms the yuan and the Korean won for use in settling trade bills within the end of this year.
In accordance with the scheme, central banks of both countries are also expected to place their respective currencies in each other’s account.
Under the agreement, the BOK will lend money, yuan currency swap proceeds it secured from the Chinese central bank, to commercial banks and the Korean firms will be able to use the proceeds in a trade settlement with Chinese firms. In this way, Korea’s exporters in China can gather payments in the won.
With this trade settlement scheme in place, both nations’ reliance on the dollar for the bilateral trade will be lessened, supporting the internationalizations of both currencies. Currently, 98 percent of all Korea-China trades are being settled in the dollar.
By using their currency swap proceeds, the won can be directly exchanged into the yuan at the Shibor Shanghai Interbank Offered Rate (SHIBOR).
“The Shibor Shanghai Interbank Offered Rate (SHIBOR) has been lowered to near the level of the Hong Kong Inter-bank Offered Rate (HIBOR) and the utilization of currency swap line arranged by the central banks will help curb volatility in interest rates, all of which contribute to raising funds in stable manners,” noted an official of the BOK.
Any lending and borrowing with Korea-China currency swap proceeds will be exempt from the reporting requirement in a bid to facilitate the new trade settlement scheme, said the MOSF.
[Written by Beom-joo Jeon - Jieun Lee/ edited by Soyoung Chung]
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