Abstract
The US-Dollar is still the most widely used currency for the settlement of trade transactions in East Asia. Currency swaps between Asian countries are one possibility to reduce this dependency on the US Dollar. This chapter explains the background and various aspects of the Korea-China currency swap-financed facility. First the framework and mechanisms of the facility with the roles of the involved central banks, commercial banks, importers and exporters are presented. Then the performance and desired effects of the swap agreement are explained. This includes the reduction of exchange rate risks, transaction costs and ultimately the increase of trade between Korea and China. Finally methods to enhance and to build on the facility, like increasing the number of involved businesses, simplifying the process and relaxing Korean foreign exchange transaction regulations are explored.
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- 1.
The BOK and the PBOC entered into Korean Won (KRW)/Chinese Yuan (RMB) bilateral swap arrangement in 2009, the size of which is KRW 64 trillion/RMB 360 billion (about USD 58 billion). Based on this bilateral swap arrangement, one party may use the other party’s currency by providing its own currency to the other party in case that financial markets need to be stabilized or local currency trade settlement needs to be promoted. For more information on the overall picture of Asian swap arrangements, refer to Aizenman et al. (2011).
- 2.
ABMI aims at promoting issuance of local currency LCY-denominated bonds, facilitating the demand of LCY-denominated bonds, improving the regulatory framework and improving related infrastructure for bond markets (e.g. development of a credit risk database). For more information, refer to Kawashima (2013).
- 3.
ABF was initially launched in 2003 using the funds raised from 11 EMEAP member central banks. ABF’s objective was to provide an innovative, low-cost and efficient product in the form of passively managed index bond funds, so as to broaden investor participation, identify impediments to bond market development in EMEAP economies and act as a catalyst for regulatory reforms and improvements to market infrastructure. For more information, refer to EMEAP (2006).
- 4.
For more information, refer to IDB (2009), p. 90–94.
- 5.
In 2010, the Bolivarian Alliance for the Americas (ALBA) introduced a common currency, SUCRE, and has been using it in intra-region trade settlement. SUCRE stands for Sistema Unitario de Compensación Regional de Pagos (Regional Unit Payment System). For more information, refer to UN (2011).
References
Aizenman J, Jinjarak Y, Park D (2011) Evaluating asian swap arrangements. Asian development bank institute (ADBI), working paper series, No. 297, July 2011. http://www.adbi.org/files/2011.07.22.wp297.evaluating.asian.swap.arrangements.pdf
Executives’ Meeting of East Asia Pacific Central Banks, Working Group on Financial Markets (EMEAP) (2006) Review of the Asian bond fund 2 initiative. June 2006. http://www.emeap.org/emeapdb/upload/WGMeeting/ABF2ReviewReport.pdf
Inter-American Development Bank (IDB) (2009) MERCOSUR report No. 13, May 2009. http://www.sciencespo.fr/opalc/sites/sciencespo.fr.opalc/files/i_mercosur_report_13%5B1%5D.pdf
Kawashima K (2013) Asian bond market initiative (ABMI). Presentation at April 5, 2013. http://www.adbi.org/files/2013.04.05.cpp.sess6.3.kawashima.asian.bond.markets.initiative.pdf
United Nations (UN) (2011) Regional cooperation and growth-enhancing policies: the new challenges for Latin America and the Caribbean. http://unctad.org/en/Docs/gds20101_en.pdf
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© 2014 Springer International Publishing Switzerland
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Shin, J. (2014). Korea-China Currency Swap-Financed Trade Settlement Facility. In: Rövekamp, F., Hilpert, H. (eds) Currency Cooperation in East Asia. Financial and Monetary Policy Studies, vol 38. Springer, Cham. https://doi.org/10.1007/978-3-319-03062-3_8
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DOI: https://doi.org/10.1007/978-3-319-03062-3_8
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