KARACHI: Pakistan and China on Friday signed a bilateral currency swap agreement to promote trade between the two countries and also further strengthening their economic ties, Pakistan's central bank said in a statement.

The bilateral currency swap agreement is of 10 billion yuan Chinese yuan ($1.58 billion) 140 billion Pakistani rupees ($1.57 billion)and would end in three years.

The purpose of this agreement is “promoting bilateral trade and investment and strengthening financial cooperation,” the State Bank of Pakistan said. This agreement comes at a time when Pakistan's finances are a grave cause for concern.

The rupee hit a record low of 90.03 this week and the country's current account deficit stood at $2.104 billion in July-Nov compared with $589 million in the same period a year earlier.

The deficit is likely to widen further in coming months because of debt repayments and a lack of external aid. Islamabad has to begin repayments on an $8 billion IMF loan in early 2012, and without additional sources of revenue, its foreign exchange reserves may come under pressure, analysts said.

It has to make a repayment of more than $1.1 billion in the second half of 2011/12 fiscal year. Foreign exchange reserves were at $16.66 billion in the week ending Dec. 16, compared with a record $18.31 billion as of July 30. This agreement also will have political significance.

“This agreement will make a significant contribution in further strengthening the close and special relationship between the two countries.”

Beijing has voiced support for Islamabad during months of worsening Pakistani-American relations, which were shaken by the US incursion in May that killed al Qaeda leader Osama bin Laden near a Pakistani military base, and a cross-border attack by US forces that mistakenly killed 24 Pakistani soldiers last month.

Pakistan has been trying to move closer to Asian powerhouse China as ties with the United States have suffered. China and Pakistan call each other “all-weather friends” and their close ties have been underpinned by long-standing wariness of their common neighbour, India, and a desire to counter-balance US influence across the region.

China invested more than $200 million to help build the deep-sea Gwadar port on Pakistan's Arabian Sea coast, partly with a view to opening an energy and trade corridor from the Gulf, across Pakistan to western China.

China also helped Pakistan build its main nuclear power generation facility at Chashma in Punjab province. Two reactors are in operation and two more are planned. Analysts say China agreed to expand the Chashma complex to counter a 2008 nuclear energy deal between India and the United States.

China's senior diplomat Dai Bingguo also arrived in Pakistan on Friday for talks with the country whose relations with key backer, the United States, have gone from bad to worse, state news agency Xinhua said.

Dai will meet Prime Minister Yusuf Raza Gilani and President Asif Ali Zardari, Chinese Foreign Ministry spokesman Liu Weimin told a daily briefing.