RMB Swap Line

This is the type of new knowledge and information you should keep abreast of, to avoid falling off the curve.
As we continue to flaunt our disregard for USD integrity and refuse to exercise discipline on fiscal finance, the tectonic plates of the new polycentric world will move currencies into directions potentially beyond our control.  Therefore, I am looking for a “shocker” that the US will pull next year to attempt to dictate the currency war to the rest of the world.

The European Central Bank said Thursday it has signed a three-year, bilateral agreement with China’s central bank, which will be able to tap €45 billion ($60.9 billion) from the ECB in a move that will allow it to meet unexpected needs for foreign-denominated funds.

“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,” the ECB said.

The ECB joins a number of central banks that have already signed similar agreements with China in a move aimed at promoting bilateral trades between the regions as well as ensuring stability of the markets.

What is a currency swap line?
Currency swap lines allow central banks to purchase and repurchase currencies from one another, which in turn makes it easier for banks in each relevant country to get hold of the underlying currencies. They are sometimes wheeled out in times of crisis to ensure liquidity keeps flowing around the markets. But they are not just there for the tough times. In China’s case, they make it easier to trade the yuan offshore. The extension of this agreement to China should ease investors’ concerns over the ability to dispose of large sums of the currency on short notice  for cash management or trade settlement needs.

Who’s in the swaps club?
In June, Britain was the first G-7 country to officially set up a currency swap line with China. Both Hong Kong and Singapore already have similar agreements. The U.K. agreement established a reciprocal three‑year sterling/renminbi currency swap line with a maximum value of the swap of RMB 200 billion.

At the time, the Bank of England’s then-Governor Mervyn King said the swap arrangement would enable the central bank to offset a sudden shortage of renminbi liquidity in London’s trading houses, helping to enhance its role in currency exchange.

China already has similar agreements with most of its trading partners, mostly emerging market countries.

Why has China’s renminbi entered the radar of European central banks?
The Chinese renminbi, or yuan, is now one of the top-10 most traded international currencies.

Number nine, in fact, according to data collected in April by the Bank for International Settlements. Trading in the Chinese currency more than tripled over the past three years to $120 billion a day in 2013, the BIS said in a triennial report published in September. The yuan was previously 17th. The expansion’s been driven by offshore trading, with renminbi turnover soaring from $34 billion a day in 2010 to $120 billion in 2013.  Since January 2012, value of renminbi trades has increased by 113% according to data provider Swift.

Where is offshore renminbi traded?
A report by Swift shows that 60% of the renminbi trading activity is currently done from the United Kingdom, which also reflects the position of London as a global trading hub for currencies. (London handles over 40% of overall global flows.) The U.S. is second in global trading values, while France is the leading euro-zone country in exchanging payments in renminbi and overtook Singapore in third place in June 2013.

What are the controls still imposed on the yuan?
The Chinese government began liberalizing the currency in 2009, but controls over payments made directly in the yuan are still in place. In early 2012, the central bank announced that all Chinese companies could settle their trades in renminbi and more directly swap foreign currencies with it.

In September, China’s central bank officials confirmed the prospect of a further loosening of controls on cross-border investment, broadening access to the economy and banking sector.

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