South Korea is set to ink a major deal with China that will increase the use of each other’s currencies in cross-border transactions.
The leaders of the two countries are expected to sign an agreement to allow direct trading of the Korean won and the Chinese yuan following their summit Thursday, sources close to the matter said.
The Seoul government has openly pushed to sign the deal as a part of its strategic plans to become an offshore trading hub for the yuan in Asia. Experts here say the direct won-yuan market will benefit exporters to China.
No previous agreement existed to trade the two currencies directly and until now traders have had to exchange the currencies through the U.S. dollar, which adds to transaction costs.
The increased use of regional currencies in trade, analysts say, will also help reduce potential exchange-rate risks.
“The strength of the won, which is currently gaining momentum at a rapid pace, could decelerate if the country expands its use of the yuan,” a local analyst said. A strong won undermines the profit of local exporters.
In addition to the direct trade deal, the Chinese authorities are reportedly considering issuing investment quotas worth a total of up to 80 billion yuan ($12.85 billion) to Korean financial institutions. The quotas would allow them to invest directly in China’s capital markets, including in stocks, bonds and money market instruments.
For China, the deal marks a step forward in making the yuan a global currency. Firms in Hong Kong, London, Singapore and Paris already have similar quotas.
During Thursday’s summit, the two leaders are to discuss ways to speed up free trade negotiations that have been underway since May 2012. The two sides are aiming to finalize the FTA talks within the year.
Reports say Presidents Park Geun-hye and Xi Jinping will sign some 10 memorandums of understanding on economic cooperation Thursday.
By Oh Kyu-wook (firstname.lastname@example.org)