Korea, China renew currency swap deal worth W70 tril.

An official from Hana Bank's counterfeit analysis center takes a look at Chinese yuan notes at its office in Seoul, May 26. Yonhap

By Lee Min-hyung

The Bank of Korea (BOK) said in a statement Thursday that it had renewed its 70 trillion won ($59 billion) currency swap deal with the People's Bank of China for another five years, in a move to promote bilateral trade and ward off any liquidity crisis.

The five-year renewal will expire Oct. 10, 2025, after both sides agreed to extend the period and the size of the arrangement from the previous three-year deal for 64 trillion won.

BOK Governor Lee Ju-yeol signed the deal with his Chinese counterpart Yi Gang, with both monetary authorities reaching a consensus in expanding the swap scale and period with a view to ensuring regional financial stability, according to the central bank.

“The two sides believe that the action will contribute to promoting bilateral trade between the two countries and regional financial stability,” an official from the BOK said. “The two sides also expect that this action will serve as a foundation for further enhancing financial monetary cooperation between two central banks.”

The deal is aimed at hedging exchange rate risks, allowing the two central banks to exchange each other's currency at a fixed exchange rate. This is crucial in the case of financial crisis when a central bank is in dire need of another's currency.

The BOK and its Chinese counterpart signed a currency swap deal for the first time in 2009 soon after the Korean economy was dealt a severe blow in the aftermath of the 2008 global financial crisis. Both sides have extended the deal three times before this latest renewal.

The Ministry of Economy and Finance expects the 70 trillion won deal to clear away any potential liquidity-related uncertainties between the two countries.

“The currency swap agreement between the two countries is expected in particular to contribute to regional financial stability amid lingering volatility in the global financial market,” a finance ministry official said.

The Chinese monetary authority has signed its biggest currency swap deals with Korea and Hong Kong. From the perspective of the BOK, the latest renewal with China is the second-largest following a $60 billion agreement with the U.S. Federal Reserve.

The Seoul-Beijing deal also comes with significance in that it can be used to fend off a liquidity crisis in times of economic uncertainties such as the ongoing economic downturn induced by the COVID-19 pandemic, according to the finance ministry.