China-Korea deal could pave the way for more RMB swap lines across the globe

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Brazil and Australia are among countries where companies are a step closer to settling trade with China using the Chinese renminbi (RMB), after a deal between the South Korea and Chinese central banks set the precedent for activating a bilateral swap line. Woon Khien Chia, RBS Head of Local Markets Strategy Emerging Asia, looks at the implications.

The People’s Bank of China (PBOC) and the Bank of Korea (BOK) said late last year they would start using an agreed a swap line worth USD59 billion to support trade settlement in each country. South Korean firms will be able to borrow funds in RMB for trade settlement from local banks, to which the BOK will lend RMB funds secured under the currency swap line with the PBOC.

Until now, the swap lines that the PBOC had granted to South Korea and more than 15 other central banks, including Brazil and Australia, only acted as stand-by facilities. Central banks in these countries could draw RMB from the PBOC to help financial institutions should they run short of RMB to settle trades.

This latest deal paves the way for other countries to activate their swap lines and in turn boost the use of RMB for trade settlement globally. It will allow many more of China’s trade partners to settle RMB trade directly, without having to go through the only available clearing pipeline operated in Hong Kong that is also subject to quota control.

The unrealised potential of these swap lines on boosting RMB settlement is huge. If all the other countries activated the entire amount of their swap lines, as South Korea did, the total renminbi funds available for companies to borrow for RMB trade settlement would be CNY1.67 trillion. This would account for 37 per cent of China’s total trade, based on 2011 and 2012 data.

According to SWIFT data, the RMB currently accounts for only 0.42 per cent of global cross-border payments and at the end of 2012 ranked 16th in global payment currencies. The data also shows that 98 per cent of RMB payments in London and 94 per cent in Singapore were for settling institutional transfers rather than trade.

An important component to increasing the use of RMB in trade is increasing the pool of CNY, the version of RMB deliverable outside China. Unfortunately, the opening of the Korea / China swap line will not directly add to this pool. Imports from either side will be settled in the currency of the exporter’s country of origin, with the importers’ agent bank drawing on the swap line to obtain the foreign currency to make the payments. There will not be any excess CNY liquidity outflows since the trades will be settled back-to-back with payments.

Nevertheless, this latest Korea / China arrangement will be a boost to the ranking of the RMB as a global payment currency, which should in turn be a boost to global investors’ confidence in holding RMB-denominated assets. It may also open up more doors to the creation of a swap line between the UK and China, which has not happened yet.

So, this unprecedented move by the PBOC for the promotion of the offshore deliverable RMB market is a very significant one in all aspects. We envisage that more of the existing swap lines will be similarly activated while the PBOC continues to extend new swap lines to more central banks globally. 

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