By Michael Ide
The Schweizerische Nationalbank (Swiss National Bank) (OTCPK:SWZNF) announced that it has entered into a bilateral swap agreement with the People's Bank of China (PBC) that allows the central banks to purchase and repurchase up to 21 billion Swiss francs or 150 billion renminbi (about $23 billion) to help establish renminbi market in Switzerland. SNB has also been granted a 15 billion renminbi investment quota in the Chinese interbank bond market which it can use to diversify its foreign exchange reserves.
"The signing of this bilateral swap agreement and the granting of a renminbi investment quota will further strengthen the collaboration between the PBC and SNB. It is a collaboration which highlights the increasingly close ties being forged between China and Switzerland," SNB wrote on its website.
Renminbi still only account for about 1% of the $5 trillion-per-day forex market, report James Shotter and Gabriel Wildau for the Financial Times, but as the size of the Chinese economy pulls ahead of the US (it's already probably the biggest trader in the world) the renminbi will only grow in importance. Even if a swap agreement is never put into use, its existence is important for markets because it guarantees a certain level of liquidity in forex markets.
After the EU sovereign debt crisis caused massive inflows to the SNB, it has 48% of its foreign reserves in euros, so the investment quota gives the SNB something productive to do with that cash and allows it to diversify its holdings away from the euro in case there is more trouble in the future.
Renminbi becoming a major global currency
China has been gradually opening up to foreign investment with projects like the Shanghai Free Trade Zone and liberalizing the renminbi by setting up direct swaps with Brazil, Japan, the US and others in its effort to be more fully integrated into the global economy. The renminbi doesn't have to supplant the dollar as the international trade currency for these efforts to pay off, it only has to be a legitimate alternative in the same vein as the euro, a goal that it seems to be achieving. Between eurozone crises and US political brinkmanship that occasionally raises the specter of an unnecessary default, traders probably wouldn't mind having another major currency to turn to in times of economic distress.