China, S Korea agree to open RMB clearing service in Seoul

China and South Korea signed a deal Thursday to launch a renminbi (RMB) clearing service in Seoul and boost cooperation between their central banks.[Special coverage]

The People's Bank of China and the Bank of Korea inked a memorandum of understanding in this regard during Chinese President Xi Jinping's state visit to South Korea, which will hopefully facilitate bilateral trade and investment by reducing transaction costs and exchange rate risks.

The move is also considered as another push for the use of RMB by banks and businesses in international transaction.

So far this year, the world's second largest economy has reached agreements with Germany, Britain, France and Luxembourg to open local RMB trading hubs, as the Chinese currency has been increasingly used in global trade and investment.

Also on Thursday, China and South Korea agreed to establish direct trading mechanism between the RMB and won, the South Korean currency, according to a joint statement signed by the two countries.

The move would eliminate the need to exchange either currency into U.S. dollars when settling accounts, and is believed to be able to save transaction fees and hedge against foreign exchange volatility.

In addition, China will grant 80 billion RMB yuan (13 billion U.S. dollars) quota of investment to South Korea under the RMB Qualified Foreign Institutional Investors (RQFII) program, the statement said.

Launched in 2011, the RQFII program allows foreign investors to invest in Chinese onshore stock and bond markets with offshore RMB.

The Chinese currency rose to be the seventh most used payment currency globally earlier this year. RMB payments grew by 29 percent month-on-month in March with a market share of 1.62 percent, up from 1.42 percent in February, according to global transaction service firm SWIFT.

The People's Bank of China is yet to announce the nomination of a clearing bank to handle RMB business in Seoul.

China is South Korea's largest trading partner, largest market of exports, largest source of imports, and largest destination of overseas investment, while South Korea was China's third-largest trading partner and fifth-largest source of foreign investment in 2013.

China's two-way trade with South Korea totaled 274.25 billion U.S. dollars last year, indicating an annual increase of seven percent, statistics with China's General Administration of Customs show. The figure equates to South Korea's trade volume with the United States and Japan combined.

The RMB deposits in the banking sector of South Korea reached a record 70 billion RMB yuan (11.33 billion dollars) at the end of May, second only to U.S. dollar in its foreign currency deposits, according to the Bank of Korea.