Rmb Bilateral Swap Agreements

At present, the total size of these swaps is still small relative to China`s foreign exchange reserves, but further expansion of these programs could pose new challenges for the management of RMB exchange rates. In a scenario where foreign exchange reserves decrease and expectations of RMB depreciation increase, the use of these swap arrangements for liquidity purposes may increase the downward pressure on the Chinese currency as the other party sells a large amount of RMB to obtain USD funding. In 2020, Turkey also signed a series of bilateral economic and trade agreements with China amid a growing conflict with the United States. For example, a $1.7 billion BSA was signed between the two countries, which represents about 8% of total trade between the two countries, or $21.08 billion in 2019. With a sharp decline in the value of the Turkish lira in 2019, the government has tried to support the Turkish lira. Turkey had desperately exhausted its foreign exchange reserves and sought help from financiers such as the IMF and the United States. According to the Turkish central bank, although the move was economically motivated, the influx of RMB eventually increased the RMB-denominated trade settlement. The ECB established swap lines with Sweden in December 2007, with the SNB and Denmark in October 2008 and with the Bank of England in December 2010. The euro area, Sweden, Denmark and the United Kingdom had relatively low foreign exchange reserves before the crisis, due to the costs associated with holding reserves and the belief that more is unlikely to be needed in the foreseeable future. However, banks in these countries borrowed large sums of money in foreign currencies in the years leading up to the crisis. When it became difficult for them to raise funds in 2008, they turned to their central banks, whose reserves proved insufficient to meet unexpected demand. The ECB`s SWAP lines were therefore used in 2009 to provide Sweden and Denmark with euros to increase their foreign exchange reserves, and the swap line with the SNB was requested to supply the ECB with Swiss francs.

The swap line with the Bank of England was set up as a precautionary measure to ensure that the Central Bank of Ireland, which is part of the Eurosystem, has access to the pound sterling, but it has never been used. Since 2007, Sweden and Denmark have more than doubled their foreign exchange reserves, the United Kingdom has doubled its reserves and the euro area has increased its reserves by 20%. This residual risk has affected swaps that other central banks have been willing to conclude. Although there are now a large number of such bilateral agreements in the world involving a large number of central banks, until recently, the US Federal Reserve was the main source of liquidity provided by bilateral swap arrangements, as dollar-denominated transactions dominate trade and financial settlement. However, the Fed has been very selective about which central banks it has signed swap agreements with, which has clearly been influenced by its perception that activating such agreements will be relatively risk-free. These exchange lines have never really been used. Even during the financial crisis, when Korea drew up to $16.4 billion from its swap line with the Federal Reserve, neither Korea nor any other country involved in these agreements used it to obtain foreign exchange. While the amounts available through Chiang Mai were potentially large enough to significantly increase a country`s reserves, IMF conditionality (to borrow more than 30% of a country`s quota) was a major deterrent to the use of Chiang Mai funds; On the other hand, borrowing the entire amount available through the Fed`s swap lines did not require an IMF program. In June 2013, the United Kingdom became the first G-7 country to establish an official currency swap line with China. [20] In practice, however, China`s currency swap arrangements have also been activated as a source of liquidity for reasons not directly related to trade. Again, taking Pakistan as an example: the country reportedly drew on the equivalent of $600 million (out of a total of RMB 10 billion, or $1.6 billion) under the swap deal in 2013 to secure its reserves and avoid an impending currency crisis.

While the operation of the swap line has only had a cosmetic impact on the country`s balance of payments statistics and has not improved the fundamentals of the country`s external positions, it has offered Pakistan the opportunity to obtain liquidity in an emergency situation without negatively affecting the value of its currency. (Pakistan eventually received a $6.6 billion loan from the IMF, which helped stabilize its economy.) In a similar move, Argentina reportedly used its swap line with China to combat a shortage of USD funds in 2014. Since 2007, central banks in developed countries have also provided swap lines for a limited number of emerging markets. Because of the risks associated with swap lines, the Fed has been much more cautious about its expansion into emerging markets than other developed markets. The Fed insisted on provisions that allowed it to seize its assets from the New York Fed if it did not repay. So far, Chinese BSAs have failed to significantly advance the internationalization of the RMB. Although there are many agreements, the RMB does not have a solid framework for countries to assess it higher than the USD or the Euro. In most cases where BSAs were used, the RMB was simply used as an intermediary to receive USD and generated minimal traction in the increase in RMB-denominated transactions. By providing liquidity in times of crisis, China has proven to be a reliable partner. This reputation may have paid off as the China-Pakistan BSA doubled from RMB 10 billion ($1.42 billion) in 2014 to RMB 20 billion ($2.84 billion) in 2019, and Pakistan`s RMB trade regime increased by 250% in 2019. As recently as March 2021, Pakistan proposed to further increase trade via BSA to RMB 40 billion ($5.68 billion).

Similarly, Argentina increased its cross-currency swap agreement with China from RMB 70 billion (USD 9.94 billion) to RMB 130 billion (USD 18.47 billion) in 2019. These agreements represent the progress made in the internationalization of the renmini and the potential for expansion of bilateral trade in the future, as China remains a strong and reliable financial partner. However, if for any reason the borrowing central bank is unable to mobilize the source central bank`s currency to complete the forward transaction, the lending bank is left with a guarantee in the form of the currency of the borrowing country. In those circumstances, that currency is likely to have depreciated against the exchange rate at which the swap was executed, which would have resulted in losses for the lender. Since 2009, China has signed bilateral currency exchange agreements with thirty-two trading partners. The stated intention of these exchanges is to support trade and investment and to promote the international use of the renminbi. A similar situation followed in Argentina in 2014. Faced with extreme peso inflation and on the brink of economic crisis, the country was unable to receive US dollars, preventing importers from buying vital consumer goods. Argentina relied on its BSA with China, but like Pakistan, instead of using it to facilitate trade between the two countries, the RMB was instead part of Argentina`s two-pronged approach to introducing the dollar into its national economy. In both cases, China did not protest the conversion of the RMB to USD, but stressed how the agreements could strengthen international trade between nations.

During the crisis, banks were very reluctant to lend to each other because of fears about the real financial situation of counterparties. This has pushed up borrowing costs, with lenders demanding higher interest rates to offset rising counterparty risk. While central banks could provide local currency to their domestic banks to reduce the cost of borrowing in that currency, their ability to provide foreign currency was limited by the amount of foreign exchange reserves they held. To address these currency financing problems, developed market central banks have agreed to provide swap lines to each other. Just as the Fed faced internal criticism for “bailing out” European banks during the financial crisis, the PBoC was publicly reprimanded for signing a swap deal with Russia shortly before the ruble`s depreciation in late 2014. The PBoC was forced to respond via Chinese social media, stating that swaps are guaranteed based on the exchange rate in effect at the time of their actual use, rather than the old interest rates that prevail at the time the agreements were signed. Previous fluctuations in the value of the ruble were therefore irrelevant – the bank was indeed well protected. But the controversy has shown how sensitive the swap issue has become in an era of global financial turbulence. Pakistan and Argentina are two of the few countries that have operated their BSAs, but not in the traditional sense. In times of financial crisis, Pakistan and Argentina used the agreements to preserve the RMB and convert it into USD in offshore markets.

Over the past decade, the People`s Bank of China has concluded bilateral swap agreements with 41 countries (see Figure 5). Despite the slight decrease in the number of active agreements between the end of 2016 and the end of 2019, the total approved value of these agreements was relatively stable, averaging RMB 3,333 billion between 2015 and 2019. .