Extension of currency swap deal with China yet undecided

By Yoon Ja-young

Korea and China continued their talks Tuesday on extending a currency swap deal, which was set to expire at midnight.

“Nothing has been completed yet and a meeting is scheduled for today as well,” Bank of Korea Governor Lee Ju-yeol told reporters Tuesday morning.

Local media reported that the central bank and the finance ministry are negotiating with their Chinese counterparts over details of the currency swap deal after agreeing in principle that it should be extended.

“When one is engaged in negotiations, the expiration date is not necessarily important. It would be good if everything was complete before the expiration of the deal, but this may not be the case,” Lee said.

Korea signed the won-yuan currency swap deal with China in April 2009. After suffering a massive outflow of capital during the 1997 Asian financial crisis, Korea has been actively signing currency swap deals. Such deals work as a buffer since a country can borrow foreign currency against its own currency. The 360 billion yuan ($56 billion) swap deal with China accounts for a significant portion of Korea’s currency swap deals which total $122 billion.

The deal has been extended twice so far, but with the expiration date approaching, there was concern that Beijing might not extend it this time. The country has been engaged in economic retaliation following Korea’s deployment of a U.S. Terminal High Altitude Area Defense (THAAD) system, despite Seoul’s explanation that it needs the missile shield to protect itself against increasing threats from North Korea. China has been claiming THAAD undermines its security. Korea has been expressing its hope to extend the deal, but China has not been so active, though it agreed the deal should be extended in principle.

Since Seoul has ample foreign exchange reserves, direct damage to Korea is unlikely if the deal is not extended. However, if the market interprets it as sign of escalating tension between two countries, it might add to risks, experts point out.

The National Congress of the Communist Party of China, scheduled for Oct. 18, is also known to be a factor delaying completion of the negotiations. China may become more active after finishing handling domestic issues.

If the two countries fail to immediately extend the deal, they are likely to suspend it for the time being and sign a new one at a later date. This will be as effective as an extension of the deal. The deal between Korea and Malaysia, for instance, expired in October last year, but the two countries agreed to extend it for three more years early this year.