Swapping makes senseWe welcome the Lee Myung-bak administration’s latest decision to expand the size of currency swap arrangements with China after having struck a similar deal with Japan last week. Yesterday, Prime Minister Kim Hwang-sik and Chinese Vice Premier Li Keqiang agreed to raise the cap on currency swaps from $26 billion to $56 billion.
Thanks to the effort, Korea gains a considerably stronger defense against steep fluctuations in exchange rates.
If you add the latest currency swap to an earlier $70 billion swap with Japan in addition to our foreign reserves of $303.3 billion, the total amount of reserves available at times of crisis will balloon to $430 billion. We hope it will help alleviate worries about possible financial crises, raised since the credit rating of the United States was notched down.
The interest rates our government must pay after borrowing money from foreign countries will also go down, which is one of the biggest benefits from the currency swap arrangement with China. In the global economy, one cannot and should not dismiss the pivotal role psychological factors plays in traders’ minds.
To put it simply, the latest arrangement with China is tantamount to a declaration that China and Japan - two of the largest foreign reserve holders - are ready to extend a helping hand to Korea if our sovereign credit rating faces a crisis. Besides, the chances of hot money from abroad fleeing our economy has gotten slimmer.
We can expect another advantage too: the currency agreement with China will give a great boost to the reinforcement of economic cooperation in the northeast Asian region. Irrefutably, our future prosperity depends on how we capitalize on the two major axes of the world economy: the Western Hemisphere, including America and Europe, and Asia, including China, which is almost on a par with the U.S. and Japan.
That’s why our government needs to push ahead with forging a common economic community in northeast Asia, not to mention the ratification of the free trade pact with the U.S., as quickly as possible. That naturally calls for more aggressive efforts by the government to conclude FTAs with China and Japan in the near future rather than being content with currency deals with our neighbors.
The government’s next step should be to pursue another currency swap agreement with the U.S., though it doesn’t necessarily need to hurry. There could be no better measure to allow us to nip a future economic emergency in the bud.