Japan, China seek to restart, expand FX swap line in sign of warming ties

FILE PHOTO: Chinese 100 yuan banknotes and a Japanese 1,000 yen banknote are seen in this picture illustration in Beijing, China, January 21, 2016. REUTERS/Jason Lee

TOKYO (Reuters) - Japan and China are in talks to resume a currency swap arrangement between their central banks and expand it roughly 10-fold, people with direct knowledge of the matter said, in a sign of warming ties between Asia’s two biggest economies.

The previous arrangement was allowed to expire in September 2013 amid a low point in Sino-Japanese ties. Relations had soured in recent years due to territorial disputes and tensions over Japan’s wartime history.

Two Japanese officials with direct knowledge of the deal said China and Japan have begun discussing a resumption of the arrangement, with one saying the scale would be about 3 trillion yen (£23.24 billion), far bigger than the previous $3 billion line.

In case of financial turmoil, the swap could act as a safety net by providing yuan to Japanese banks operating in China and yen to Chinese businesses.

Chinese Premier Li Keqiang flagged the proposed resumption of the swap agreement with Japan in May. One Japanese source said Beijing was eager to resume the swap arrangement.

Kyodo News said on Tuesday a deal would be announced at a financial dialogue to be held in Beijing this month, but a Japanese finance ministry official said it was more likely that it would come at an upcoming Japan-China summit.

Tokyo is trying to arrange a meeting between Prime Minister Shinzo Abe and Chinese President Xi Jinping in October and wants to use the renewed swap agreement as a symbol of cooperation, Kyodo said, without citing sources.

The People’s Bank of China did not immediately respond to a faxed request for comment on Tuesday.

The swap was originally launched in March 2002 as part of multilateral currency swap lines known as the Chiang Mai Initiative, which was established in response to the Asian financial crisis in the late 1990s.

Reporting by Yoshifumi Takemoto and Kazuhiko Tamaki; Additional reporting Stanley White, Tetsushi Kajimoto and Beijing Newsroom; Editing by William Mallard and Sam Holmes