South Korea, China Let Currency Deal Expire as Ties Cool Over U.S. Missile Defense

By Kwanwoo Jun Features Dow Jones Newswires

South Korea and China have let their eight-year-old bilateral currency swap agreement expire, indicating cooling ties after Seoul decided to host an advanced U.S. missile defense system that Beijing opposes.

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Though the agreement, which allowed the countries to swap 360 billion yuan for 64 trillion won ($56 billion) in trade settlements, ended at midnight in Seoul on Tuesday, South Korean policy makers said bilateral discussions to renew the deal were still under way.

"It will be great if things can be concluded before the currency swap deal expires, but that is not always the case," Bank of Korea Governor Lee Ju-yeol told reporters hours before the deal expired. Mr. Lee declined to elaborate on the continuing negotiations.

The currency swap line was largely designed to boost bilateral trade and enhance financial stability by reducing the reliance on dollars for the settlement of trade and other cross-border financial transactions. South Korea and China first established the deal in 2009, and its value doubled in 2011. In 2014, the deal was extended another three years.

Previous renewals of the deal had been easily agreed but Chinese negotiators are now exercising more prudence than they had in previous talks. "They say things have changed now," said a Bank of Korea official who declined to be named.

Relations between the two countries have deteriorated after South Korea recently deployed the U.S.-built Terminal High Altitude Area Defense system. Seoul says the system targets North Korean missile threats, but Beijing is concerned that the Thaad's powerful radar can be used to spy on China.

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Korean media have reported that China may have delayed its decision on the currency swap deal as the leadership in Beijing focuses on the Communist Party Congress, an important twice-a-decade political gathering which begins next week.

The People's Bank of China wasn't immediately available for comment.

China is South Korea's largest trade partner, taking about a quarter of Korea's total shipments overseas.

South Korea is interested in maintaining as many currency-swap deals as possible as buffers against external shocks in times of financial stress because it is a small and open economy. Sudden capital outflows amid the economic turmoil in 1997 and 2008 caused liquidity crises in South Korea's financial system.

South Korea maintains separate currency swap deals with Australia, the United Arab Emirates, Malaysia and Indonesia. It is also a participant in a multilateral currency swap agreement among Asian nations known as the Chiang Mai Initiative.

Write to Kwanwoo Jun at kwanwoo.jun@wsj.com

(END) Dow Jones Newswires

October 10, 2017 21:55 ET (01:55 GMT)