Renmibi internationalization via bilateral swap lines


March 18, 2022 • 11:06 a.m. ET

Renmibi internationalization via bilateral swap lines

Hung Tran

Russia’s brutal war of aggression against Ukraine has triggered unprecedented sanctions imposed by the United States, Europe and other countries against various Russian entities. The most significant step to date is to deny Russia’s central bank – the Bank of Russia (BoR) – access to most of its international reserves held in major world currencies by Western central and commercial banks. This has sparked speculation about efforts by some other countries to shift their international reserves to currencies and institutions perceived to be less vulnerable to possible US and Western sanctions. China and the renminbi (RMB) featured prominently in the discussion. In the current context, this article examines China’s approach to internationalizing the use of RMB through an increasing number of bilateral swap lines (BSL) with countries around the world.

BSLs are real safety nets for global financial stability

Bilateral swap lines (BSL) are agreements whereby two central banks agree to acquire the currency of the other in exchange for its own, either up to a previously agreed limit or for an unlimited amount. Traditionally, BSLs have been used to provide foreign currency liquidity to a central bank in need, helping it stabilize a foreign currency liquidity crisis threatening financial stability. The most important was the BSL network maintained by the US Federal Reserve (the Fed) with five permanent counterparts (the Bank of England, the European Central Bank, the Bank of Canada, the Swiss National Bank and the Bank of Japan) who have unlimited access to each other’s currencies; and with nine other central banks on an ad hoc basis subject to limited caps and duration. The Fed’s BSLs played a crucial role in alleviating widespread dollar liquidity or funding crises during the 2007-08 global financial crisis and the financial turmoil related to the Covid-19 pandemic in March 2020. In contrast, the IMF can either lend to specific countries in balance of payments crises subject to conditionality or offer precautionary lines of credit to pre-approved countries as insurance against market pressures – neither of these facilities are suited to do in the face of generalized dollar liquidity or funding crises.

In addition, the Chiang Mai Initiative (CMI) was launched as a set of BSLs between the 10 ASEAN countries and China, Japan and South Korea after the 1997 Asian financial crisis. to complement existing international liquidity facilities. In 2019, the CMI was transformed into a multilateral agreement called Chiang Mai Initiative Multilateralization (CMIM) with a liquidity pool of $240 billion from which member countries can draw up to 30% of their shares without having to guarantee a program. of the IMF. These swap lines have not yet been used, but their availability has provided some reassurance and comfort to member countries in times of financial turmoil.

Chinese BSLs

In addition to the MIMC, China has also entered into bilateral currency swap agreements with 41 countries around the world from 2009 to 2020, totaling more than 3.5 trillion RMB ($554 billion). Although these BSLs can be used to meet liquidity needs in RMB (or other local currency), the motivation behind these agreements has been to settle bilateral trade and investment transactions in RMB (or other local currencies) in order to reduce gradually dependence on the USD. in bilateral transactions both for political reasons and to avoid volatility in the dollar value of local currencies due to changes in US Fed monetary policy.

The BSL network that China has developed with several Asian countries is particularly interesting: South Korea (180 billion RMB or 29 billion dollars), Singapore (150 billion RMB or 24 billion dollars), Indonesia ( 100 billion RMB or 16 billion dollars), Malaysia (180 billion RMB or 29 billion dollars). 80 billion or 13 billion dollars) and Thailand (70 billion RMB or 11 billion dollars). The motivation here is to favor local currency settlement (LCS) agreements for the bilateral trade of each of these countries with China. Indeed, Indonesia announced that the LCS has reduced the country’s exposure to the US dollar by $2.53 billion in 2021 and will further increase by 10% in 2022. Moreover, as stated by the Indonesian Minister of Finance, Sri Mulyani, “the LCS will create a financial safety net for financial transactions”. between countries and reduce the risks of vulnerability due to global economic shocks”. In short, BSLs promoting local currency settlements got off to a modest start, but are indicative of a broader, long-term trend to reduce reliance on USD in international transactions.

BSL of Russia and China

After the Crimean sanctions in 2014, Russia intensified its efforts to move away from the dollar in its international reserves of $630 billion. Russia reduced the share of the dollar in its reserves (to 21.2%) while increasing the share of other major currencies including the euro (to 29.2%) and the RMB (to 12.8%) as well as gold (at 23.3%). Russia has also settled more of its growing bilateral trade with China in RMB – from 3.1% in 2014 to 17.5% in 2020, and likely much more now – facilitated by a bilateral swap line of 150 billion RMB ($24 billion) with the PBOC and China’s Cross-Border Interbank Payments System (CIPS). Following the stricter sanctions triggered by the invasion of Ukraine, these bilateral reserves, exchange and payment agreements will certainly increase to compensate to some extent for the Bank of Russia’s inability to transact in dollars, in euros and pounds sterling. In addition, Russian banks issued credit/debit cards linked to the Chinese international Union Pay system, after Visa and Mastercard left the Russian market.

It is important to keep in mind that trading in RMB will help the BoR avoid sanctions on transactions in dollars, euros and pounds sterling, but could expose Chinese financial institutions, including the PBOC, to possible secondary US sanctions – for helping Russian-sanctioned entities evade US sanctions. Whether the United States is willing to impose secondary sanctions on Chinese financial institutions and whether China will push back using its recently passed blocking law remain important open questions – these measures will significantly increase the already high tension between the two countries. Against this backdrop, media have reported that China’s major state-owned banks have been reluctant to deal with Russian companies, even though China’s chief banking regulator has said that China will not join Western sanctions and “maintain normal economic, commercial and financial exchanges”. with all parties concerned. In addition, US Commerce Secretary Gina Raimondo has previously warned Chinese companies against sourcing high-tech products such as semiconductors from Russia in violation of US sanctions.

Roles of digital yuan – and cryptocurrencies

When China launches its central bank digital currency – eCNY – it will greatly facilitate the use of RMB in bilateral cross-border trade and investment transactions with China by countries that have already agreed to do so for political reasons. . The availability of eCNY alone will not lead to a large-scale increase in the international use of RMB, primarily due to China’s closed capital account and lack of full RMB convertibility; the relatively underdeveloped state of China’s financial markets; and the fact that foreign users of eCNY will be monitored by Chinese authorities, which many potential users may be reluctant to accept; unless they are forced to do so by Western sanctions.

Cryptocurrencies were also mentioned as possible alternative instruments that central banks can hold as part of their reserves. This is simply not feasible given the scale of today’s cryptocurrency markets; the problem that, to be useful, cryptocurrencies must be converted into other fiat currencies on exchanges which are themselves vulnerable to sanctions; and the fact that true cryptocurrency requires a distributed public ledger system that will leave the power to validate transactions out of the control of a central bank, which no institution with monetary sovereignty can accept.


Western sanctions, especially the one against the Russian central bank – however justified as a countermeasure against the Russian invasion of Ukraine – have violated the presumed sanctity of central bank reserves . This will lead to efforts by a number of non-Western countries, particularly those who feel vulnerable to sanctions, to develop an alternative payment system to avoid and dilute the full impact of sanctions. The RMB has been and will be increasingly used in this alternative system.

It is important to note that the use of the RMB to settle bilateral trade and investment transactions between China and another country fits well with the Chinese approach to the internationalization of the RMB via a multitude of BSL subject to China’s discretion and control – instead of China liberalizing its capital account and allowing the RMB to be fully convertible, i.e. freely usable by anyone in the world. The likely destination of the efforts mentioned above is not to replace the USD’s role in global finance, but to realistically develop an alternative payment system for use by countries that have made the political decision to do so. do, especially among sanctioned countries. Nevertheless, these efforts will fragment the global payments system, accelerating the fragmentation of the global economic system – rendering it less efficient and productive at a time when more resources are needed to address many of the pressing challenges facing humanity – such as climate change, improving health systems to prepare for future pandemics, and growing inequality between rich and poor in many countries.

Hung Tran is a Nonresident Senior Fellow at the Atlantic Council, former Executive Director General of the International Institute of Finance and former Deputy Director of the International Monetary Fund.

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Image: Chinese currency background.

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