China and South Korea Push For More Use of Local Currencies in Trade

South Korea said it agreed with China to allow banks in both countries to borrow funds from an existing swap arrangement to encourage trade settlement in local currencies.

A 64 trillion won ($59 billion) swap line will be made available for loans to allow companies in both countries to settle deals in the won and yuan, according to a statement today from theFinance Ministry and the Bank of Korea. The system is scheduled to start later this month, it said.

The agreement is part of a push among emerging countries to internationalize local currencies after the global financial crisis, according to the South Korea statement. Both China and South Korea acknowledge that the use of the won and yuan is “very low” even as trade between the two countries is increasing, it said.

“We expect several benefits, such as reduced foreign- exchange risk and transaction costs for companies,” according to the statement. Alleviating “external vulnerabilities due to decreased dependence on the major reserve currencies” is also a reason for pursuing the deal, it said.”

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