China has signed a $31bn currency swap agreement with Australia, a step towards boosting the renminbi’s profile in developed markets.
Beijing has established nearly 20 bilateral swap lines in the past four years, but Australia is the biggest economy yet to sign such a deal, which analysts said could give a shot in the arm to Beijing’s goal of internationalising its currency.
While central banks normally use swaps to provide liquidity to each other in the event of a financial crisis, China has been using them to lay the groundwork for the renminbi’s slow march into global markets.
In announcing the Rmb200bn/A$30bn deal, the Reserve Bank of Australia said: “The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial co-operation.”
It added that there were “increasing opportunities available to settle trade between the two countries in Chinese renminbi and to make renminbi-denominated investments”.
China now has more than Rmb1.5tn in swap lines with other central banks, but they have largely been symbolic. Only Hong Kong, the hub of offshore renminbi trading, has had to activate its swap with China, doing so briefly in 2010 when it faced a renminbi squeeze.
Nevertheless, the symbolic steps are beginning to add up to something bigger, said Shen Jianguang of Mizuho Securities in Hong Kong. “It’s quite significant. They haven’t had agreements with such advanced economies. This will gain momentum,” he said.
There has been talk that the Bank of England and the Bank of Japan could soon be in line for currency swaps with China.
Building up a global pool of renminbi is proving a challenge for China. The currency is permitted only to flow out of the country through tightly controlled channels, mainly trade.
The settlement of trade deals in renminbi grew swiftly from a low base over the past two years, but it has appeared to run out of steam in recent months and offshore renminbi deposits have declined.
Some economists say that until China takes bolder steps to open its capital account, the project of renminbi internationalisation will not fulfil its promise.