The central banks of China and the Republic of Korea (ROK) signed an agreement on Friday to establish a 180 billion yuan (US$26.3 billion) currency swap, China's central bank has announced. The swap agreement is intended to provide short-term liquidity support to the banking systems in both economies, and support bilateral trade, the bank said.

The three year agreement sets an upper transaction limit of 180 billion yuan or 38 trillion Korean won (about US$28 billion), the People's Bank of China (PBOC) said on its website. The PBOC said the three-year term could be extended by mutual agreement.

The two sides have also agreed to discuss the possibility of changing a proportion of the swap currencies into foreign exchange reserves.

The PBOC said the swap agreement would complement a US$4 billion agreement with the ROK established under the May 2000 Chiang Mai Initiative, which set up a network of currency swap agreements among the 10 members of the Association of Southeast Asian Nations (ASEAN), China, Japan and the ROK.

A senior official of the PBOC said the agreement "manifested the willingness of both parties to reinforce cooperation and make concerted efforts to cope with the crisis, in order to boost market confidence and maintain regional financial stability."

He said the agreement is in line with the spirit of the Chiang Mai Initiative, and that the PBOC would "actively study the possibility of currency swaps with other central banks, " adding that "strengthening financial cooperation in our region is conducive to maintaining regional financial stability and promoting economic development, and will make a significant contribution to global financial stability."

In a related development, the Bank of Korea and the Bank of Japan announced an increase in the maximum amount of their 2005 bilateral won-yen swap arrangement from three billion US dollars equivalent to twenty billion US dollars equivalent. The increase will remain effective until the end of April, 2009.

The Bank of Korea said the action would mitigate the adverse influences of the global financial turmoil and contribute to securing stability in the region’s financial markets.

(China.org.cn by John Sexton December 12, 2008)