China lends first foreign-denominated funds under currency swap

China's central bank on Friday lent 400 million Korean won to support trade settlement financing for Chinese importers of goods from the Republic of Korea (ROK), marking its first use of foreign currency under currency swap agreements.

The small symbolic move, announced by the People's Bank of China (PBOC) on its website, marks a shift in the world's second-largest economy, where policymakers hope enterprises will increase the use of the renminbi and other alternative currencies to the U.S. dollar in trade and investment settlement.

A Chinese bank borrowed the first Korean won-denominated funds under the currency swap line between the PBOC and the Bank of Korea, the ROK's central bank, then granted the won-denominated loans to a Chinese company to make payments for ROK imports.

Under the currency swap agreement, the PBOC's Friday lending in Korean won is equivalent to some 2.4 million yuan (about 390,000 U.S. dollars).

"The first use of Korean won funds by the PBOC has boosted cooperation under the bilateral currency swap agreement," the PBOC said in a statement, adding that Chinese and Korean enterprises could reduce the costs of financing and currency exchange through the swap.

Beijing and Seoul extended their currency swap agreement for another three years in October 2011, doubling the value of the deal to 360 billion yuan from the previous 180 billion yuan.

The PBOC and the BOK agreed in December 2012 to use the swap line to support trade settlement in each country's respective currencies for domestic companies.

China has become the ROK's largest trading partner, with a bilateral trade value of 274.2 billion U.S. dollars last year.

Under the agreement, Chinese firms are able to borrow Korean won funds for trade settlement from domestic commercial banks, to which the PBOC will lend the Korean won funds through the currency swap line with the BOK, or vice versa.

Since 2009, the PBOC has signed 23 currency swap agreements worth 2.5 trillion yuan with foreign central banks to help maintain regional financial stability and facilitate bilateral trade and investment.

Those currency swaps serve as an alternative to the U.S. dollar and offer extra liquidity support to signee countries apart from their foreign reserves.

The PBOC said it will work closely with overseas monetary authorities, including the BOK, in the future to let currency swaps play a more positive role through the wider use of local currencies in bilateral trade and investment.