ECB to Create Currency Swap Line With China Central Bank

By Todd Buell, Bob Davis, Anjani Trivedi
October 10, 2013 (Wall Street Journal)

Agreement, Set to Last Three Years, Underscores China's Growing Financial Heft

An agreement between the European Central Bank and the People's Bank of China on a currency swap line shows the Chinese currency's growing importance on the international stage.

Thursday’s agreement between the European Central Bank and the People’s Bank of China on a currency swap line is the latest example of the Chinese currency’s growing importance on the international stage. The yuan may still be tightly regulated, but recent data shows that its market share is inching closer to that of other major currencies.

The ECB’s bilateral currency swap with the Chinese central bank. announced Thursday, will last three years and will guarantee the ECB access to as much as 350 billion yuan ($57.2 billion) while the PBOC will be able to tap €45 billion ($60.9 billion) from Europe’s central bank.

“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 written statement.

For China, the ECB deal represents one of its most significant efforts to increase the use of the yuan, or renminbi, internationally. The ECB swap line follows a similar deal China’s central bank made with the Bank of England in June. Since then, China has signed swap agreements with the central banks of Hungary, Albania and Iceland.

The deal with the ECB “is groundbreaking as the ECB has central-bank representatives from different European countries,” said a note from Australian bank ANZ.

Beijing’s long-term goal, government officials have long said, is to turn the yuan into one of the world’s major currencies, both for economic reasons and political ones.

Thursday’s deal shows that China is getting closer to its goal.

Recent data suggests that while the dollar, euro, yen and sterling still make up almost 75% of foreign-exchange volumes, the Chinese currency is closing in on the Canadian dollar and Swiss franc, which have market shares of 1.99% and 2.34% respectively. The renminbi’s market share has climbed to 1.49%, and since January 2012, the currency’s trading volume has risen 113%, surpassing the Swedish krona and overtaking the Korean won, Hong Kong dollar and Russian ruble.

Chinese central baker Zhou Xiaochuan got approval to expand the yuan internationally in large part by arguing that it would be a symbol of China’s rise, Chinese economists say. Having the yuan in broader circulation can also help ease trade deals between China and other nations.

When Beijing officials first started signing swap lines in 2009, they largely found interest among nearby countries such as Malaysia and Korea, or those that frequently face financial woes, like Argentina.

But over time, wealthier nations have also lined up for swap arrangements. Luis Kuijs, an analyst at RBS in Hong Kong, said that those nations, like the U.K. or, in the case of the ECB, euro-zone nations, are looking to rev up their yuan-denominated trade.

Christian Noyer, the governor of the French central bank and a member of the ECB’s policy-making Governing Council, praised the deal, saying it was something that his central bank had actively supported. France is the leading euro-zone country in exchanging payments for yuan.

With the ECB, signing a swap deal “would be to get RMB business onto the Continent,” referring to the currency markets’ abbreviation for renminbi.

European capitals such as London and Paris are looking to compete with Hong Kong and Singapore for that business. The Europeans “are interested in having more RMB activity in their vicinity,” so it is in their interests to have these deals, Mr. Kuijs said. Foreign central banks can use the swap lines to quickly tap more yuan, if necessary.

Among the major central banks, the U.S. Federal Reserve, the Bank of Japan and the Swiss National Bank still don’t have swap lines with China.

–Brian Blackstone in Washington, Chiara Albanese in London, William Horobin in Paris and Liyan Qi in Beijing contributed to this article.

Write to Todd Buell at todd.buell@wsj.com, Bob Davis at bob.davis@wsj.com and Anjani Trivediat anjani.trivedi@wsj.com