Local currency swaps to deepen monetary ties

China has renewed local currency swaps with three European central banks totaling 540 billion yuan ($75 billion), a move experts said highlights deepening monetary cooperation to safeguard financial stability and the renminbi's growing global role amid efforts to diversify from the dollar-based system.

On the sidelines of the bimonthly meetings of governors held by the Bank for International Settlements from Sunday to Monday, People's Bank of China Governor Pan Gongsheng renewed bilateral local currency swap agreements with his counterparts at the European Central Bank, Swiss National Bank and Magyar Nemzeti Bank — the central bank of Hungary.

Central banks' local currency swaps are agreements that allow two monetary authorities to exchange their currencies and provide liquidity support to each other.

They allow cross-border trade and investment to be settled directly in local currencies, lowering costs and reducing exchange rate risks, while supplying offshore markets with liquidity and helping stabilize financial markets in times of stress.

Zhang Liqing, director of the Center for International Finance Studies at the Central University of Finance and Economics, said that global financial safety nets have long suffered from insufficient resources and operational shortcomings. Bilateral swap agreements and liquidity arrangements, he said, are key components of such safety nets.

"Facing an uncertain global economic and financial environment, appropriately expanding the scale of renminbi bilateral swap agreements and liquidity arrangements — based on reasonable assessment — can demonstrate China's willingness and capacity to safeguard global financial stability, while also advancing the internationalization of the renminbi," Zhang said.

Under the renewed arrangements, the China-EU swap line has been set at 350 billion yuan/45 billion euros ($53 billion) for a three-year term, said China's central bank. The China-Switzerland deal covers 150 billion yuan/17 billion Swiss francs ($21 billion) over five years, while the China-Hungary line amounts to 40 billion yuan/1.9 trillion forints ($5.7 billion), also for five years.

The size of the three swaps is unchanged from previous arrangements.

The renewals came in as part of China's accelerated push to strengthen local currency swap cooperation with its trading partners, especially those participating in the Belt and Road Initiative.

In August, the PBOC renewed its local currency swap agreement with the Reserve Bank of New Zealand, valued at 25 billion yuan and effective for five years. In the first half of the year, similar renewals were completed with Indonesia, Brazil, Turkiye and Sri Lanka.

The central bank's second-quarter monetary policy report showed that, by the end of June, foreign monetary authorities had drawn 80.7 billion yuan under swap arrangements, while the PBOC had used foreign currencies equivalent to about 400 million yuan.

These cooperations have facilitated bilateral trade and investment, supported the development of offshore renminbi markets and improved the overseas usage environment of the Chinese currency, according to the report.

Zhang Lianqi, a member of the Standing Committee of the 14th National Committee of the Chinese People's Political Consultative Conference, said the internationalization of the renminbi is not only a strategic choice by China but also "an inevitable requirement of the multipolar development of the global economy".

Renminbi internationalization helps reduce the externalities of the dollar-dominated system and improves the efficiency of resource allocation, said Zhang Lianqi, who is also chairman of the Enterprise Financial Management Association of China.

"It offers a new path for building a fairer and more stable international financial order," he said, adding that it also represents a significant step in advancing the Global Governance Initiative.

The PBOC has stepped up international engagement in recent weeks. On Thursday, the central bank said it had signed a memorandum of understanding with the Central Bank of the Republic of Azerbaijan to strengthen exchanges in areas including monetary policy, payments and financial technology.