The People’s Bank of China and European Central Bank announced a landmark currency swap deal on Thursday as the renminbi passed another milestone on the road to its full internationalisation.
The facility, valid for an initial three years, will make up to Rmb350 billion ($57 billion) available to the ECB and up to €45 billion to the PBoC. That's smaller than the Rmb800 billion arrangement some analysts forecast earlier this year but still means the new swap line is China's third-largest after those with Hong Kong and South Korea.
“Given the significance of the eurozone, the agreement is another major step forward in the Rmb’s internationalisation process, even though the size is smaller than some estimates,” said Ju Wang, senior FX strategist at HSBC.
The Chinese central bank has similar currency swap arrangements in place with its counterparts in the UK, Australia and Brazil and it is only a matter of time before more are struck, Ju said.
“As the Rmb becomes more international in nature, the FX swap lines between the PBoC and other central banks will become increasingly common. And the size of these swaps will likely get bigger.”
The PBoC's agreement with the ECB comes as trade and investment booms between China and the euro region, not least leading capital goods exporter Germany, and is designed to reassure banks managing those flows of the continuous availability of renminbi if market conditions become strained. So the agreement is seen providing an important backstop to market liquidity.
“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 in a statement.
The swap line in turn will provide Beijing.with another avenue to promote the renminbi for use in global trade and finance. It also comes as the country looks increasingly to Europe to raise debt. On Thursday, Sinopec joined Cnooc in tapping the euro-denominated debt market, as it issued a €550 million seven-year note.
The internationalisation of the renminbi has been an incremental process to date. Hong Kong was established as an offshore renminbi trading centre in 2010 and since then Taiwan, Singapore and London have all followed suit.
Many companies with global interests have also begun to settle their Chinese transactions in renminbi. US bank Citi just this week announced the issue of Latin America's first-ever renminbi letter of credit to broaden that trend further, prompting speculation that the PBoC could soon reach out to more central banks in Latin America.
“With many FX swap lines between China and Europe already established, speculation will grow that more lines will be established between China and the Americas," said Ju.
According to international payments platform Swift, the renminbi was eleventh in the rankings of world currency payments in August, with a 0.87% market share, up from fourteenth in January and seventeenth in January 2012.