China's First Step Towards Bilateral Currency Swaps

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Includes: CYB, FXI, PGJ
by: Bo Peng

Before the proposal of replacing USD with IMF's SDR as the world reserve currency, made by Zhou Xiaochuan, China's central banker, China had already made a series of bilateral currency swaps with some neighboring countries, with maturities of up to three years. Now they're extending the arrangement to Latin America.

Here's the list (in Billion Yuan, recent CNYUSD exchange rate 6.835):

  • Hong Kong: 200
  • South Korea: 180
  • Indonesia: 100
  • Malaysia: 80
  • Argentina: 70
  • Belarus: 20

According to a prominant economist in Beijing, these swaps serve dfferent purposes for each counterparty country: for Hong Kong, it's to prepare for the pending sale of Chinese T-bills there; for South Korea, it's for helping Korean companies raising capital in China; for Belarus, it's because Belarus wants to take CNY as their foreign reserve; for the rest, it's for settling bilateral trades (companies pay in the trading partner's local currency).

The implications are very intriguing:

  1. The official line on the rationale behind these swaps is to reduce forex risk and trading cost. This is a valid point.
  2. It offers support for currencies under downside risk. This applies to all except HKD.
  3. It serves to diversify China's foreign reserve, albeit only a small percentage (5%) so far, away from USD and to align the composition better with trading partners.
  4. Perhaps most importantly, the real meaning is that these are the first concrete step toward a post-USD world. The world trade cannot be based on bilateral currency swaps, to be sure. And CNY has a long way to go before it can become a world reserve currency. But as a transition, this certainly beats bartering, which has been remerging among countries and individuals.

Whether this will be brought up in the G20 summit remains an interesting question.

Stock position: None.