The prospects of a currency swap deal between China and South Korea appear to be “optimistic”

The $56 billion swap deal is South Korea’s largest ever currency swap deal, accounting for nearly 45% of its swap arrangements. The deal is likely to cement economic ties and act as an additional layer of a safety net.

A senior South Korean source disclosed that the central banks of South Korea and China appear to be on track to extend a $56 billion currency swap deal that expires today.

The source described the prospects of the swap happening as “optimistic”.

The development comes in the wake of Chinese officials taking unofficially measures to restrict trade and tourism in South Korea as a retaliation against Seoul’s decision to deploy a THAAD missile defense against a nuclear threat from North Korea.

The $56 billion swap will ensures both central banks have access to sufficiently large amounts of each other’s currency in the event of an increased demand for liquidity at a short notice.

On Tuesday, Lee Ju-yeol, the governor of Bank of Korea remained cautious and asked for patience since talks were still on going.

“There is no outcome yet, and we have meetings even today,” said Lee when asked if the deal would be extended. “As we talk, expiration isn’t all that important and negotiations are still taking place. It will be great if things can be concluded before expiration but that is not always the case”.

Earlier South Korea’s finance ministry had publicly stated that the swap would cement existing financial safety nets.

Despite risks of a nuclear attack from North Korea, China is angry at South Korea’s decision to host the Terminal High Altitude Area Defense (THAAD) since its powerful radars can look deep into its territory.

If the swap deal were to go through, it would signal the easing of tensions, at least on economic terms, between the two nations, said Kim Doo-un, a foreign exchange analyst at Hana Financial Investment.

“Extending the deal could indicate that Beijing would still want to separate economics from politics,” said Kim. “Even if the deal is extended, they are unlikely to make a huge public announcement ahead of the congress as policy matters are typically in lock-down mode.”

Significantly, the $56 billion swap deal is South Korea’s biggest ever currency swap deal since it accounts for nearly 45% of its swap arrangements.

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