Yuan and Won: Now this is New

Marc To Market's picture

There has been much fanfare over the swap lines that China's central bank has established with numerous countries.  Many observers see those lines as evidence of the internationalization of the yuan and its increasing importance in the global economy.  


We were somewhat more skeptical, recognizing that the swap lines were not being used.   It seemed it was mostly about optics and less about substance.  


However, earlier this week South Korea and China made an announcement that suggests a new and more substantive evolution.  Essentially, China and South Korea indicated they will activate the swap line (KRW 64 trillion and CNY360 bln roughly equivalent to $59 bln).  The purpose is to lend yuan and won to importers/exporters via banks to facilitate the settlement of bilateral trade flows. 


Reports suggest the central bank of South Korea will begin holdings meetings with domestic firms to explain how the new facility will work.  Initially, yuan loans of 3-6 months is anticipated.  Chinese firms will have new access to won, though the details are not immediately clear.  


China is South Korea's single largest trading partner, accounting absorbing a quarter its exports.  Bilateral trade was about $220 bln last year, but only 3% was settled in the yuan or won, with the latter having a greater share.    SWIFT, the major global transactions services company, reports that the yuan, which is not fully convertible, was the 16th most used currency in terms of world payments in October.  


China has been keenly pursuing the internationalization of the yuan.  Data from the PBOC shows that during the first three quarters of this year, about 11.4% of China's total trade or CNY2.05 trillion (~$329 bln) was settled in yuan.   In 2011, about 8.4% of China trade was settled in yuan. 


However, the China-Korea agreement is not just about the yuan.  The Korean won will also be used to settle trade.  This is important.  The internationalization of the yuan is being bolstered by a larger effort to use local currencies to settle trade flows.  China is the world's largest exporter.  South Korea is the world's seventh largest exporter.  


The agreement took a couple of years to negotiate and could be template for others.  The deputy director general of the Bank of Korea's international department said that it intends to arrange similar agreements with others trading partners. 


Lastly, it seems noteworthy that the security issues and the escalation of the territorial dispute appears on a completely separate track from the closer economic integration.   Although these seems like a contradiction, it does not appear necessary to be resolved in the short to medium term. 

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e-recep's picture

due to budget cuts american military existence on earth will get weaker. that alone is the biggest threat to the us dollar. and budget cuts at this point are unavoidable.

Radical Marijuana's picture

Sounds like another significant step towards the fall of the US dollar as the world's reserve currency ... which shall eventually be an enormous shock to the American people!

Orly's picture

Hi, Marc.  I just ordered your book.  It seems you know what you're talking about and have a different, more sober and wide-ranging view of global economics than most other contributors.

I hope I learn something from the book that will make me a more well-rounded forex trader.



Orly's picture

"Lastly, it seems noteworthy that the security issues and the escalation of the territorial dispute appears on a completely separate track from the closer economic integration."

While this may seem all well-and-good on the surface, there can be no doubt that the South Koreans are worried about Chinese sabre-rattling in the South Asian Sea area, with international incidents involving the Japanese, Indians and now the Vietnamese.

They must be taking another look at any suggested expansion of their swaps programs with the Chinese as militarism and boisterous expressions of might make the Koreans very nervous.  They are attached on the Korean Peninsula, after all, and any advance by the Chinese could result in the ultimate destruction of that area.

I don't know about you, but it would sure make me nervous.


old naughty's picture

while one may be hopeful of power shift, it is nevertheless a dangerous game...

Announcement newly by US to include "the small rock in dispute" into the US-Japan joint-defense pgm is just small play imho, something big is brewing (mind you it probably has been brewing for a while...)

So, it will be interesting (sadly) to watch what comes next.


Jack Sheet's picture

As long as you're not wrong being long the dong.