Outlook for S. Korea-China Currency Swap Uncertain

Even though the country’s fiscal and monetary authorities say their working-level officials are continuing to engage in negotiations with their Chinese counterparts, it remains uncertain whether the two sides will further extend the period of the $56 billion swap.

This is mainly because of the ongoing geopolitical dispute over the US anti-missile system deployed in South Korea, Yonhap reported.

And Beijing has been direct to say and show it is not and will not be happy with the Terminal High Altitude Area Defense, even if Seoul and Washington say it is aiming at Pyongyang.

China has been retaliating against the Korea-US alliance’s move, targeting mostly Korean companies, including Lotte, Hyundai Motor and AmorePacific. The world’s second largest economy even refused to talk to Korea by not sending its commercial trade minister to the ASEM meeting in Seoul last month.

As the ongoing situation does not seem to brighten the future relations between the two sides, it is taking a toll on the outlook for the bilateral swap deal. The government and the central bank have asked the public to wait and be patient as they are working with China.

“Our policy is we seek to extend the swap with China without setbacks, and we are doing our best to achieve the best result,” Finance Minister Kim Dong-yeon said of late.

Bank of Korea Governor Lee Ju-yeol also echoed Kim, recently telling reporters, “We would like to conclude the talks as fast as we can, and the People’s Bank of China’s position over this issue is no different from ours.”

Korea and China sealed the swap deal three years ago, following two extensions in 2009 and 2014.

The country first made the won-yuan currency swap in December 2008 as Korea sought to further prepare itself against future financial crises by beefing up its foreign currency reserves.

Meanwhile, China has been seeking to make the yuan as one of the key global currencies, along with the US dollar, euro and Japanese yen.

Korea’s $56 billion swap with China is significant because it accounts for nearly 46% of the country’s total swap deals with other economies. Some say it will not make any difference even if the talks to extend the swap fall apart given Korea’s foreign currency reserves at more than $380 billion, a record high.

However, others say if they do not extend it, it would be lose-lose for both because Korean banks will face losses from not being able to trade yuan. Also, China’s efforts to make the yuan an international currency will be negatively affected.