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UPDATED: January 4, 2009 NO. 2 JAN. 8, 2009
Currency Swap Against Crisis
By helping their neighbors, Asian economies also help themselves

CLOSER TIES: People visit a South Korean display at an exhibition of small and medium-sized enterprises in China and South Korea in Guangzhou on September 22

On December 12, the People's Bank of China and the Bank of Korea jointly announced a bilateral currency swap arrangement worth 180 billion yuan ($27 billion), or 38 trillion Korean won. The three-year deal aims to provide liquidity for the financial systems in the two countries and keep their currencies stable.

Setting up such a currency swap was the core of the Chiang Mai Initiative, established in 2000 to encourage bilateral swap agreements between countries in the ASEAN+3-the 10 members of the Association of Southeast Asian Nations plus China, Japan and South Korea. Under these agreements, countries exchange currencies for a limited period of time and then return the original amount.

China and South Korea first signed a $2 billion currency swap agreement in June 2002, increasing the amount to $4 billion when they extended the agreement in 2005. The new agreement not only further increases the amount to about $26 billion, but also allows for direct exchanges between the yuan and won instead of using the U.S. dollar.

The expanded agreement is a response by leaders in both countries who are concerned with maintaining currency stability in an unstable global economy. It also reflects China's growing economic strength and the close economic ties between the two countries.

China is now the world's fourth largest economy, and South Korea the 11th largest. The two neighbors have close trade and economic relations. China is South Korea's biggest trading partner, while South Korea is China's sixth biggest. Their bilateral trade volume in 2007 was about $160 billion. Therefore, as the financial crisis drags down the world economy, the currency swap between the two countries will help improve short-term liquidity conditions in their financial systems, promote bilateral trade and advance their economic development. The two sides can increase demand for each other's export commodities while easing capital shortages and keeping the exchange rate stable.

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