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Agreement reached on currency swap deal

By Xin Zhimingand Cui Xiaohuo (China Daily)
Updated: 2008-12-20 07:49

The mainland and Hong Kong have agreed to sign a currency swap deal and the central government will provide capital support to the region "when it's necessary", its Chief Executive Donald Tsang said on Friday.

Tsang did not reveal the amount of the deal, but analysts said it sends a strong signal that the central bank will help stabilize the Hong Kong economy and its currency.

The deal is one of 14 support measures Premier Wen Jiabao promised the special administrative region when he met with Tsang in Beijing yesterday.

Tsang also said mainland firms will be allowed to settle deals in yuan in Hong Kong, which analysts said is a step to enhancing the influence of the Chinese currency internationally.

Although the amount of the currency swap is not known, Sun Lijian, an economist with Fudan University, said it will help shore up confidence in the Hong Kong economy, as in the 1997-98 Asian financial crisis when the central bank provided support to combat international speculators.

As the US dollar remained strong, the Hong Kong dollar, which is linked to the US dollar, has been popular with investors. But after the US Federal Reserve cut its interest rate on Tuesday, which is expected to weaken the US dollar, there may be pressure on investors to sell their Hong Kong dollars, he said.

"The timing of the announcement of the deal will help stabilize investor confidence in the Hong Kong dollar," Sun said.

The move, together with the agreement that the yuan can be used to settle business deals, demonstrates China's efforts to make it acceptable as a global currency, analysts have said.

Zhou Xiaochuan, governor of the Central Bank, was reported to have said in Hong Kong that settlements using the US dollar will cause problems if the dollar's value fluctuates drastically.

Last week, China and South Korea reached a three-year deal on currency swap worth 180 billion yuan ($26.3 billion), which analysts said is another step for the yuan's internationalization.