Companies in China seek won loanThe first won-denominated loan from the currency swap line of credit between Korea and China has been made, the Bank of Korea reported yesterday, a development that could lead to increasing use of the local currency in international trade and reduced dependence on the U.S. dollar.
A China-based multinational company and a joint venture requested a 400 million won ($392,000) six-month loan through China’s Bank of Communications.
Woori Bank will process the loan, which it receives from the Bank of Korea, and hand the payment to the Chinese companies’ trading partners in Korea.
Although there have been yuan loans from the 64 trillion won (360 billion yuan) currency swap to Korean companies since December 2012, this is the first time a won loan has been requested as a trade settlement.
Hyundai Motor earlier this year requested 120 million yuan from the currency swap for a trade settlement through the Bank of Communications. It was the largest loan that has been requested by a Korean company.
“The use of won loans will not only help internationalize the Korean currency in global trades, but also further strengthen financial security by reducing dependency on the U.S. dollar,” said Park Jun-seo, head of the central bank’s International Financial Advancement Team.
The won loan facilitated through the currency swap comes after the Korean central bank announced on Monday that it has agreed to utilize the 5 trillion won (15 billion ringgit) currency swap line of credit with Malaysia for trade settlements.
There have been growing demands since the global crisis that currency swaps should be aggressively used as trade settlements in order to reduce dollar dependency.
“In times of crisis, the currency swap acts as a financial safety net,” said Park of the BOK. “However, the currency swap also can be used in trade settlements in order to hedge dollar exchange rate volatility while lowering the cost for companies.”
Especially with the dollar exchange rate increasingly unstable, the Korean government and central bank have been pushing Korean businesses to take advantage of currency-swap loans.
Since the opening of the market yesterday morning, the won fell below 1,010 against the greenback before recovering to 1,020. The currency market closed with the Korean won just barely hanging on to the 1,020 won barrier at 1,020.1.
Already, some market experts project the won could fall below 1,000 if foreign investors continue to buy Korean stocks with the current account surplus continuing to flood the market with dollars.
On Thursday, the Korean central bank announced that in April the current account balance reported a surplus for a record 26th consecutive month.
Some market experts say increasing trade in local currency will save companies huge amounts on exchanging the won to dollars while hedging dollar-exchange volatility.
Securing currencies of other countries has been costly. For Korean companies in the past, in order to secure trade settlement in renminbi, they mostly sought out loans in Hong Kong.
The currency-swap loan, however, not only simplifies the process of securing such loans, but guarantees a preset interest rate regardless of a company’s credit rating.
“Additionally, because in a currency-swap loan between two countries there’s a need for a local bank to be in the countering country, it would provide a good opportunity for Korean banks to expand into the global market,” said a researcher at the Korea Capital Market Institute.
Other than China and Malaysia, the Korean central bank is reportedly negotiating to use local currencies as trade settlements with other countries that have currency swap deals with Korea, including Australia, the United Arab Emirates and Indonesia.
Since the late 2000s, China has been aggressively moving to internationalize its yuan as a key global currency, much like the Japanese yen or the U.S. dollar.
According to a report by Society for Worldwide Interbank Financial Telecommunication (Swift) released in October, the Chinese yuan is the world’s eighth most traded currency.
The Chinese government has been especially aggressive in increasing its efforts to promote the use of local currencies in bilateral trades.
Other countries like Russia and Japan have employed similar strategies since late 2010.
According to the report, in 2011, the Chinese renminbi for the first time outpaced Russia’s ruble in international trade settlements.
The Chinese central bank - the People’s Bank of China - has reached currency swap agreements with central banks in 23 countries since 2009.
Since expanding the size of the bilateral swap from 38 trillion won (180 billion yuan) to 64 trillion won (360 billion yuan) in October 2011, China and Korea have tried to encourage companies to utilize the agreement for trade settlements.
The currency swap agreement is set to expire in October, but it is likely to be extended for another three years.
BY lee ho-jeong [firstname.lastname@example.org]