With the Korea-China currency swap agreement worth 400 billion yuan (about 70 trillion won) expiring on the 10th, attention is on whether the two countries will move to immediately extend it. The Bank of Korea (BOK) is maintaining the position that it is "in discussions," and expectations are growing that the agreement is likely to be renewed on the occasion of the Asia-Pacific Economic Cooperation (APEC) summit on the 31st.
According to the Bank of Korea on the 29th, the recently expired Korea-China currency swap was a 400 billion yuan deal signed in Oct. 2020 that had been extended to a five-year term instead of the previous three years. As instability in the global foreign exchange market grew during the COVID-19 pandemic, the two countries expanded the term to secure liquidity and stabilize financial markets. However, with the maturity now reached, the agreement has formally ended.
The Korea-China currency swap was first signed in 2002 with a size of $2 billion, and was extended every three years to $4 billion in 2005, $30 billion in 2008, and $56 billion in 2011. Even during periods of diplomatic friction such as the THAAD dispute, the two countries maintained the agreement, preserving a minimal "safety valve" for economic and financial cooperation. In particular, among the currency swaps China has with other countries, the Korea-China agreement is among the largest along with Hong Kong (800 billion yuan).
Experts see a strong possibility that the two countries will again move to extend it to stabilize the foreign exchange market. With the launch of the second Trump administration increasing external uncertainty, the won-dollar exchange rate has continued to surge. The dollar-yuan rate has fallen to the low 7-yuan range on progress in U.S.-China tariff talks, but it has shown significant volatility whenever discord is sensed.
Heo Jun-young, a professor of economics at Sogang University, said, "If a currency swap is maintained and then halted, it could raise suspicions of friction between the BOK and the People's Bank of China, so there is a possibility of an extension for the sake of market stability." Park Sang-hyun, a researcher at iM Securities, said, "From the BOK's standpoint, signing currency swaps with multiple countries helps stabilize financial markets, so it will aim for an extension," adding, "It can serve as a tool to signal that foreign exchange can be supplied in an emergency."
If the currency swap resumes, it is expected to have a positive effect on the recent increase in yuan-denominated settlements. According to the Korea Center for International Finance, while Korea's trade with China in the first half of this year fell 3.3% from a year earlier, yuan settlements held steady at $14.1 billion. The share of yuan in overall settlements for trade with China rose to 11% from 10.5% last year. This shows that the Korea-China currency swap can contribute not only as a simple liquidity backstop but also to diversifying the structure of trade settlement.
Professor Heo said, "Although trade growth between Korea and China has slowed recently, trade volumes could increase compared with before if China's economy improves," adding, "Extending the Korea-China currency swap will play a positive role in terms of trade settlement."
However, it has not yet been decided when and in what form the agreement will be re-signed. A currency swap agreement can be extended through consultations between the two countries even after maturity, and the procedural gap typically does not have an immediate impact on financial markets. A Bank of Korea official said, "The extension of the Korea-China swap is being discussed smoothly," adding, "A swap can be consulted and concluded even after the term has expired."
Some view the APEC summit to be held in late this month in Gyeongju, North Gyeongsang, as an important turning point. The South China Morning Post (SCMP) in Hong Kong, citing anonymous sources, reported that People's Bank of China Governor Pan Gongsheng recently met with Bank of Korea Governor Rhee Chang-yong and Bank of Japan Governor Ueda Kazuo in Washington, D.C., during the World Bank (WB)-International Monetary Fund (IMF) annual meetings to discuss the currency swap issue, and predicted that additional discussions could take place at the APEC summit.
Kim Jeong-sik, an emeritus professor in the Department of Economics at Yonsei University, said, "There is a possibility that the Korea-China currency swap will be extended on the occasion of APEC," adding, "From China's perspective, it is meaningful in that it can promote the internationalization of the yuan by supplying liquidity to Asian countries, and for Korea, cooperation with China could prod the United States and provide momentum to make discussions on a Korea-U.S. currency swap more concrete."