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China and South Korea in currency swap deal

By Xin Zhiming and Li Xiaokun (China Daily)
Updated: 2008-12-13 09:09

China and South Korea said on Friday that they had reached a deal on a currency swap worth 180 billion yuan ($26.3 billion).

The deal will last for three years and can be extended upon the agreement of the two sides, according to a statement by the People's Bank of China (PBOC).

Its aim is to provide adequate liquidity for the financial systems of the two major East Asian economies, the statement said, adding that the fundamentals of the both economies remained sound.

A currency swap, or cross-currency swap, is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, give back the original amounts swapped.

The South Korean won has depreciated more than 30 percent this year due to the worsening global financial crisis. The currency swap deal would provide South Korea with more liquidity to help keep its currency stable, analysts said.

South Korea's foreign exchange reserves were $200.5 billion by the end of November, $11.7 billion less than a month ago, while China has accumulated about $1.9 trillion in foreign exchange reserves.

It is imperative for Asian countries to join forces to combat the impact of the global financial turmoil as it starts to affect their economies, said Sun Lijian, an economist with Shanghai's Fudan University.

Beijing and Seoul earlier signed a currency swap deal worth $4 billion under the Chiang Mai Initiative, a mechanism that came into effect in 2000 to regulate bilateral currency swaps between China, South Korea, Japan and the Association of Southeast Asian Nations economies to ward off financial risks.

China and South Korea agreed to discuss the possibility of transforming the swapped currencies into reserves currencies, the PBOC statement said.

China would make active efforts to help stabilize the regional financial situation, the PBOC said. It will consider establishing similar mechanisms with the central banks of other Asian nations at the appropriate time, the statement said.

The currency swap agreement came one day before the leaders of China, South Korea and Japan were due to meet in Fukuoka, Japanese Prime Minister Taro Aso's hometown, to discuss the global financial turmoil.

Premier Wen Jiabao, South Korean President Lee Myung-bak and the Japanese prime minister are scheduled to attend the summit.

Japan's Kyodo News Agency reported that swap currency agreements are to be confirmed in a joint declaration on combating the financial crisis at the three-nation summit.