China and South Korea have decided to use their Rmb360bn/W64tn (US$57.8bn) currency swap agreement to support trade between the two countries.

Under this scheme, to be implemented in the second half of December 2012, the Bank of Korea (BOK) will lend its renminbi (Rmb) currency swap proceeds to banks in Korea, supporting Korean firms’ Rmb payments for settlement of their trade with China.

The People’s Bank of China will also lend its won currency swap proceeds to banks in China to support Chinese firms’ won payments for settlement of their trade with Korea.

The move fits into China’s push for gradual Rmb internationalisation, and Korea’s campaign for increased use of the won in current account transactions, as part of the country’s plan to develop its foreign exchange markets.

“This new facility is expected to alleviate the sluggishness of settlement in the won or Rmb even despite the rapid increase in trade between Korea and China, by serving as a trigger enhancing the international uses of both countries’ currencies,” the BOK says in a statement.

Korean Banks are now allowed to apply for loans on a rolling basis, and to repay them early to avoid “idle money problems occurring when the Rmb currency swap funds are used”, the bank adds.

The agreement excludes non-bank financial institutions, and covers purchases of export bills, collections of documents against acceptance, export bills, open account invoice financing, transfers involving foreign currency loans, purchases of bankers’ acceptances, among others.

Loans will be priced at Shibor, the Shanghai interbank offered rate.

Korea’s ministry of strategy and finance will also revise its foreign exchange transactions regulation to waive reporting requirements for won lending and borrowing among non-residents. This will allow Chinese banks to extend won-denominated loans to local companies without having to report these loans to the Korean finance ministry.

“We expect several benefits including reductions in the FX risks and transaction costs for firms, the alleviation of external vulnerabilities due to decreased dependence on the major reserve currencies, and the further promotion of trade,” the BOK says.