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South Korea, China discussing currency swap extension

Friction over missile defense clouds future of Seoul's forex safety net

Won, yuan and yen notes: The top central bankers of South Korea, China and Japan will confer about debt this week.   © Reuters

SEOUL -- The Bank of Korea is in talks with its Chinese counterpart over extending their 360 billion yuan ($56 billion) currency swap deal, a critical mechanism in the event of a financial crisis, the South Korean central bank said on Wednesday.

The BOK said it wants to renew the three-year deal that expires in October but cannot guarantee it will happen, since there are two sides involved. The arrangement has been extended every three years since it was forged in 2008, amid the global financial crisis.

"Our officials are in discussion with the Chinese [side] over the currency swap deal," said Lee Kang-won, a BOK director. "We will see whether we can extend the deal with the same amount or not."

The state of bilateral ties could complicate the talks. The relationship has soured over the deployment of a U.S. missile defense system in South Korea's southeastern rural village of Seongju -- a move China strongly opposes.  

Seoul's interest

Economists say the swap deal is important for monetary policy, as it supports currency stability and offers a cushion in case of a crisis. 

"The currency swap deal can boost the value of the Korean won because it provides a safety net for foreign currency liquidity, even though it does not mean an inflow of dollars," said Chung Yong-tak, an economist at KTB Securities.

The pact is considered particularly vital for South Korea, given that its similar arrangement with Japan was allowed to expire in 2015 due to territorial friction. Seoul has no swap in place with the U.S., either. In February, the BOK doubled its swap arrangement with the Reserve Bank of Australia to 9 trillion won or 10 billion Australian dollars -- the equivalent of around $8 billion --  but this is still not seen as a sufficient buffer.   

Bank of Korea Gov. Lee Ju-yeol speaks to reporters in Seoul in June.   © AP

Currency swaps can also help to increase foreign reserves, as they enable countries to exchange currencies when needed at previously agreed-upon rates. South Korea's foreign reserves reached $384.8 billion in August, up $1.1 billion from a month earlier. The country has been steadily building its stockpile, having learned from liquidity problems during the global financial crisis in 2008 and the Asian financial crisis in the late 1990s.

The BOK also said the chief central bankers of South Korea, Japan and China will convene on Wednesday for two days of meetings in the Songdo business district of Incheon, where they will discuss the rising debt levels in the three key Asian economies.

BOK Gov. Lee Ju-yeol will chair the meetings with Bank of Japan chief Haruhiko Kuroda and People's Bank of China head Zhou Xiaochuan. South Korea is closely monitoring its ballooning household debt, while China is focused on corporate debt and Japan is saddled with a heavy government debt load.

South Korea's household debt reached 1,388.3 trillion won in the second quarter, up 2.1% from three months earlier, due to rising mortgages and other lending. 

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