S.Korea to increase using RMB for trade settlement

South Korean trade companies are expected to increase using Renminbi yuan for trade settlement as Bank of Korea (BOK) is scheduled to start lending RMB fund earned through the currency swap deal to local banks as early as next week, a senior central bank official said Thursday.

"Borrowing costs for the Chinese yuan are higher than those for the U.S. dollar funds. But the yuan borrowing that comes from the yuan-won swap line will reduce currency risks and help local trade firms diversify their trade settlement currency," Eun Ho- sung, head of BOK's international financial stability team, told reporters.

The BOK announced last month it had signed an agreement with the People's Bank of China (PBOC) to support trade settlement in each country's currency for respective local companies by using the yuan-won swap line.

Under the agreement, South Korean firms will be able to borrow the renminbi funds for trade settlement from local banks, to which the BOK will lend the yuan funds secured under the currency swap line with the PBOC.

The PBOC and the BOK agreed in October 2011 to extend their currency swap line for another three years, doubling the value of the deal to 360 billion yuan, or 64 trillion won (59 billion U.S. dollars).

The South Korean central bank planned to begin offering the yuan-borrowing service starting next week, Eun said, noting that almost all local banks and local branches of Chinese banks reached a deal with the BOK to provide such lending to local companies who want it.

The yuan funds will require local companies to pay higher borrowing costs than the dollar funds, but Eun stressed that the yuan borrowing will give various advantages such as reducing currency risks and trade settlement diversification.

The yuan-borrowing service was expected to activate trade between Beijing and Seoul and reduce dependence on reserve currency such as the U.S. dollar, Eun said, adding that it will help make the yuan-won swap line permanent.