Korea-China currency swap extension can be a turning point for resolving conflict

Korea-China currency swap extension can be a turning point for resolving conflict. October. 09, 2017 11:27. .

The currency swap agreement of 56 billion dollars (360 billion yuan), reached by the Bank of Korea and the People’s Bank of China, is due Tuesday. It is reported that working-level negotiations between the two governments have mostly finished and only the final decisions of the leaders are awaited. The South Korean government has been negotiating in the belief of extending the bilateral swap deal. However, China, until Sunday, just two days before its expiration, has not commented formally or informally on whether the swap should be extended. Some analyze that the Chinese leadership is not going to show a conciliatory gesture to South Korea, currently in conflict over the deployment of Terminal High Altitude Area Defense (THAAD), ahead of the opening of the Communist Party National Convention or the 19th party congress, which falls on Oct. 18.

Currency swap is a contract to lend currency to each other when the foreign currency is urgently needed, like in the financial crisis. It is a kind of protective measure as if putting off fires in an emergency. Korea and China signed a currency swap deal in April 2009 and extended the agreement for three years in October 2014. The Seoul-Beijing currency swap accounts for 45.8 percent of the total currency swaps that Korea makes with foreign countries. Korea-U.S. and Korea-Japan currency swaps expired in 2010 and 2015, respectively. Thus, Korea-China currency swap agreement is significant in that it is the de facto swap arrangement with key currency.

Above all, currency swap is more meaningful in that it shows the commitment to economic cooperation among the parties. The extension of Korea-China currency swap will be a signal light of how the economic conflicts caused by the THAAD deployment will unfold in the future. If the swap contract expires without extension, China’s retaliation will continue for the time being. With the trade conflict with China deepening, it is hard to negotiate in favor of Korea. On the contrary, if the swap contract is extended, Korean companies, which have been suffering from China’s so-called THAAD retaliation, will be upbeat about the Chinese market.

Currency swap is a safety device that blocks the instability of the foreign exchange market in advance. It is also a strong message that Korea can control the economic risks on the Korean Peninsula. If necessary, the South Korean government should look ahead to the political situation after the Chinese party congress and make utmost efforts for economic diplomacy lest China put an end to the bilateral currency swap and ruin Korea-China economic exchanges.