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North Korea nuclear crisis

China, South Korea agree to extend currency swap deal, but does it mean tensions are easing?

Opinions mixed on whether new deal will help to improve relations that were soured by dispute over THAAD

PUBLISHED : Friday, 13 October, 2017, 1:07pm
UPDATED : Friday, 13 October, 2017, 10:14pm

South Korea said on Friday it had agreed with China to extend a currency swap deal between the countries’ central banks, a decision that could point to an easing of diplomatic tensions with Beijing over security issues.

The US$56 billion currency swap, which was due to have expired on Tuesday would be extended for a further three years, according to South Korea’s finance ministry and the Bank of Korea.

A central bank official said the agreement was struck on Tuesday, ahead of the expiration, and that the extension commenced on Wednesday.

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The swap ensures both central banks have access to large amounts of each other’s currency should extra liquidity be needed at short notice.

Some investors had earlier speculated that the two countries might fail to sign a renewal ahead of the deadline due to political tensions over South Korea’s decision to host the Terminal High Altitude Area Defence system.

Beijing had been unofficially restricting trade and tourism with South Korea in response to Seoul’s decision to host the THAAD. China said the system’s powerful radar could probe deep into its territory.

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An analyst in Seoul said China’s nod to extend the currency swap deal was a sign the chill between the two economies was thawing.

Lee Sang-jae, an economist at Eugene Investment & Securities, said the decision showed Beijing would not be burning its bridges with Seoul, even if it maintained its longer term criticism of THAAD.

“It shows China may not extend the ongoing boycotts to its economic policies with South Korea. There will still be tension, but them agreeing to extend the deal is good news for Seoul,” Lee said.

However, Cai Jian, a Korean affairs expert at Fudan University in Shanghai, said the agreement to extend the currency deal was less a sign of warming ties and more to do with Beijing’s desire to promote the yuan.

“I don’t think this suggests any obvious change in bilateral relations … after the THAAD deployment,” he said.

“The currency swap deal is an important part of a greater effort to push forward the international use of the renminbi, and it would harm the interests of both China and South Korea if the swap was not extended.”

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Furthermore, with the situation on the Korean Peninsula becoming increasingly complicated it was unlikely that there would be any significant improvement in relations between Beijing and Seoul in the near future, Cai said.

“There is little room for either side to make compromises,” he said.

Additional reporting by Laura Zhou