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A Quick Analysis of Renminbi (RMB) Swap Agreements

The genesis of contemporary currency swap mechanisms can be traced back to the mid-20th century. Under the Bretton Woods system, the burgeoning international payment deficit of the U.S. necessitated strategic countermeasures. In an endeavor to stave off speculatory attacks on the dollar and mitigate gold drainage, the Federal Reserve, in the nascent years of the 1960s, forged an inaugural swap nexus with select European nations, Canada, and the Bank for International Settlements. Following the dissolution of the Bretton Woods system, the purpose of the Federal Reserve's currency swaps changed, using them as crisis-response monetary policies. For instance, following the 2008 global financial crisis, in order to maintain the stability of the international financial market and address the dollar liquidity issue, the Federal Reserve ratified bilateral currency swap accords with a plethora of global monetary institutions. By channeling dollars to multinational banks via these central banking conduits, a liquidity exigency was assuaged. During the recent global COVID-19 pandemic, bilateral currency swaps once again played a significant role.

In contrast, China's bilateral currency swaps primarily aim to stimulate international trade and foreign investments, propel the internationalization of the RMB, and gradually de-dollarize amidst the backdrop of international geo-economic competition. Furthermore, the duration of RMB swap arrangements is typically prolonged, with some analyses indicating an average span of approximately three years. Geographically, China's currency swaps encompass a more expansive array of countries. The figure below shows the global coverage of currency swaps with China and the United States. Countries and regions colored in red have consummated currency swap agreements with China's central bank (PBOC); those in blue have engaged in such accords with the U.S. Federal Reserve; and those illuminated in yellow have ratified swap agreements with both China and the United States.

Source: China Merchants Securities, accessed on 6 August 2023

For China, there are several salient advantages associated with RMB swap lines:

Trade Enhancement and Diversification: The facilitation of direct currency exchange acts as a countermeasure against the overreliance on dominant international currencies, notably the U.S. Dollar. Such a mechanism not only streamlines trade transactions between China and involved countries, especially in the Belt and Road Initiative (BRI), but also fosters economic interdependence and diversification of currency reserves.

Bolstering Financial Resilience: In times characterized by liquidity constrictions or pronounced financial volatility, the accessibility of RMB becomes an invaluable buffer. This accessibility is pivotal in fortifying the resilience of the local economy, ensuring the continuity of financial activities, and anchoring the stability of indigenous financial markets.

Strategically Advancing RMB's Global Stature: The establishment of these swap lines aligns with China's aim to gently enhance the global recognition of its currency. As more countries consider incorporating RMB into their trade and investment practices, it naturally augments the currency's role in the international financial landscape. However, this evolution should not be construed as an unequivocal indication that the RMB will ascend to preeminent international currency status in the imminent horizon. Although the dominance of the dollar will “inevitably decline”, the currency configuration for cross-border transactions remains dominated by the dollar and the euro. In addition, as Barry Eichengreen argues, currencies of smaller economies may play an increasingly important role as a result of emergent technologies, hinting at a paradigm shift in the international monetary order from a history punctuated by the predominant influence of major powers.

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