The European Central Bank and the People’s Bank of China agreed to establish a bilateral currency swap line, bolstering access to trade finance in the euro area and strengthening the international use of the yuan.
The swap line will be valid for three years and have a maximum size of 350 billion yuan ($57 billion) when Chinese currency is provided to the ECB and 45 billion euros ($61 billion) when money is given to the PBOC, the Frankfurt-based central bank said in an e-mailed statement yesterday. The arrangement is available to all Eurosystem counterparties via national central banks, it said.
“The swap arrangement has been established in the context of rapidly growing bilateral trade and investment between the euro area and China, as well as the need to ensure the stability of financial markets,” the ECB said. “From the perspective of the Eurosystem, the swap arrangement is intended to serve as a backstop liquidity facility and to reassure euro area banks of the continuous provision of Chinese yuan.”
PBOC Governor Zhou Xiaochuan pledged on June 28 to expand cross-border use of the yuan, also known as the renminbi, and encourage multinational companies to include the currency in their asset portfolios. China will allow direct trading between the yuan and foreign currencies and push for more convertibility without giving up control of capital flows, Zhou said.
“It’s a reflection of the increasing bilateral trade and a measure to accompany China’s push for wider flexibility in the exchange rate,” said Stefan Schneider, chief international economist at Deutsche Bank AG in Frankfurt. “China is integrating itself more and more into global financial markets and such agreements are part of that.”
China is the European Union’s second-largest trading partner after the U.S. The 28-nation bloc exported 71.4 billion euros of goods to China in the first six months of this year, with imports totaling 133.6 billion euros, according to the latest Eurostat data.
The Bank of England was the first in a race among European central banks to establish swap facilities with China, when it agreed on a line of 200 billion yuan and 20 billion pounds ($32 billion) in June. China, the world’s second-largest economy, has similar agreements with countries including Australia, Turkey, Brazil, South Korea and Malaysia.
Hong Kong has the largest swap agreement at 400 billion yuan, followed by South Korea with 360 billion yuan, with the ECB’s 350 billion yuan the third-biggest, according to PBOC data. The ECB swap line is smaller than initially anticipated. Frankfurt Main Finance, a lobby group based in Germany’s financial capital, said in July the facility may be as much as 800 billion yuan.
“London as the global center for currency trading still has the best chances for becoming the European center for trading in the renminbi,” Mark Williams, chief Asia economist at Capital Economics Ltd., said by phone from London. A swap line is “mainly of symbolic importance. It provides a backstop to the use of renminbi abroad,” he said.
Frankfurt is basing its push to become an offshore trading center for yuan on Germany’s close ties with China, the nation’s third-biggest trading partner. The two countries imported and exported goods and services valued at 144 billion euros between them last year, according to the Federal Statistics Office in Wiesbaden, Germany.
The swap agreement with the ECB “is for a very significant amount,” Christian Noyer, France’s representative on the ECB’s Governing Council, said in a statement. “This reflects the strong position of the euro in terms of international exchange. Euro-zone banks and French banks now have at their disposal the security they need to develop their business in renminbi over the long term.”
The Governing Council will discuss “technical modalities” and their communication in due course, the ECB said.
The yuan was the world’s eighth most-traded currency in August, up from 11th in January 2012, the Society for Worldwide Interbank Financial Telecommunications, or Swift, said in an Oct. 8 statement.
“Yuan is certainly becoming more internationalized,” Williams said. “Users of renminbi in Europe can have more reassurance that in any financial squeeze they would still be able to access renminbi liquidity.”