China designates yuan clearing bank in Seoul

Move will help local companies reduce transaction costs, facilitate trade

Seoul has joined other Asian and European cities in establishing yuan clearing banks, which will allow China and South Korea to conduct more business in the yuan rather than relying heavily on US dollars.

China's central bank said Friday that it has appointed Bank of Communications, the country's fifth-largest lender, to be a clearing bank for the yuan business in Seoul.

The announcement came after a deal signed on Thursday between the two countries to launch a yuan clearing service in Seoul.

On the previous day, the two sides also agreed to set up direct won-yuan trading.

The yuan clearing business in Seoul will facilitate cross-border transactions among companies and financial institutions from China and South Korea through the use of the yuan.

It will also facilitate bilateral trade and investment, the People's Bank of China, the central bank, said in a statement.

"Setting up a yuan clearing bank in Seoul will provide local banks with a faster and more secure yuan clearing service. It's more of a technical issue," Zhao Xijun, deputy director of the School of Finance at the Renmin University of China, told the Global Times Sunday.

"Direct trading between the won and the yuan will help local companies reduce transaction costs and lower foreign exchange risks," Zhao said.

"It will also reduce the two Asian neighbors' dependence on the US dollar."

Currently South Korean and Chinese companies or financial institutions use the US dollar as the main settlement currency, as the yuan and the won are not fully exchangeable in the global market.

The establishment of a yuan clearing bank in Seoul is also in line with increasing circulation of the Chinese currency in South Korea, where yuan-denominated bank deposits reached a record high of $11.97 billion by the end of June, making the yuan the second-largest foreign currency after the US dollar, latest data from the Bank of Korea showed.

The move is also seen as the Chinese government's latest effort to boost the use of the yuan in international transactions.

So far this year, China has signed agreements with Germany, Britain, France and Luxembourg on yuan clearing services or yuan trading hubs.

"These countries all have close trade relations with China, so they have strong interest in boosting offshore yuan business," Zhao said.

China was South Korea's largest trade partner and biggest destination of outbound investment in 2013, and the EU's second-largest trade partner last year.

Setting up yuan clearing banks in Europe is also a major policy milestone in the currency's internationalization, Liu Linan, a Hong Kong-based strategist with Deutsche Bank, said in a research note.

Europe is likely to become the second-largest offshore yuan market after Hong Kong, as we expect yuan settlement in EU-China bilateral trade to triple in the next three year, Liu noted.