December 4, 2012 / 5:01 AM / 5 years ago

China, South Korea agree to boost yuan, won use in trade

SEOUL (Reuters) - Trade giants China and South Korea have agreed to utilize their currency swap valued at $59 billion to boost the use of yuan and won in bilateral trade, Seoul’s finance ministry and central bank said on Tuesday.

Chinese 100 yuan banknotes are seen in this picture illustration taken in Shanghai January 17 , 2011. REUTERS/Carlos Barria

Central banks of the world’s largest and seventh largest exporters will begin lending trading firms yuan and won through banks from later this month for use in settling trade bills, the Ministry of Strategy and Finance and the Bank of Korea said in a joint statement.

“Using local currencies for trade settlement has been a global trend since the end of the 2008-2009 global financial crisis,” Eun Ho-sung, deputy director general of the Bank of Korea’s international department, told reporters. “We plan to arrange similar agreements with other countries after this.”

Another central bank official said the agreement was the result of two years of talks with China and had nothing to do with South Korea efforts to curb the won’s volatility.

The swap arrangement for 64 trillion won ($59.09 billion) or 360 billion yuan was established late last year to help boost the pool of currencies the two countries can tap into at times of stress in addition to official foreign reserves.

The Bank of Korea plans to hold discussions with companies in Seoul to explain the terms of new facility to provide loans with maturities of three or six months.

China buys about one-quarter of South Korea exports, and is its largest market, but payment made in yuan or won accounts for only about 3 percent as the bulk is settled in U.S. dollars.

Though China is the world’s second largest economy, the “redback”, as the yuan is known, is not fully convertible. China keeps a tight control over its currency’s value, allowing the exchange rate against the dollar to move a maximum one percent either side of a midpoint set each day by the central bank.

In October, the yuan was the 16th most used currency in the world currency payments table, according to SWIFT, a global transaction services organization.

China is, however, committed to developing the offshore yuan market as part of its grand plan to make the currency fully convertible.

As part of its efforts to internationalize the yuan, Beijing first launched a yuan trade settlement scheme in July 2009 in a few cities and expanded it to other parts of the country last year.

The yuan, also known as the renminbi, is increasingly being used by overseas companies to settle trade transactions with Chinese counterparts.

Yuan trade settlement amounted to 2,050 billion yuan ($329.16 billion) in the first nine months of 2012, accounting for 11.4 percent of total trade and the ratio hit 13 percent in September alone, data from the People’s Bank of China showed.

Meanwhile, China has been steadily opening up its domestic bond and stock markets to overseas yuan holders, including selected foreign central banks and investors.

($1 = 1083.1 Korean won, 6.2279 Chinese yuan)

Reporting by Christine Kim; Additional reporting by Se Young Lee in SEOUL, Kevin Yao in BEIJING; Editing by Choonsik Yoo and Simon Cameron-Moore

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