The People’s Bank of China and the European Central Bank on Thursday have a signed currency swap agreement to boost trade between the two regions, marking China’s largest such deal outside Asia to date and representing a huge step towards the yuan’s internationalisation.
The three-year swap line will have a maximum value of 350 billion yuan ($57 billion) and will allow more trade and investment between the regions to be conducted in euros and yuan, without first having to convert into another currency such as the U.S. dollar.
“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,” said the ECB in a statement cited by Bloomberg.
“From the perspective of the Eurosystem, the swap arrangement is intended to serve as a backstop liquidity facility and to reassure euro area banks of the continuous provision of Chinese yuan,” the central bank said.
The value of the swap agreement is also “a very significant amount,” added Christian Noyer, France’s representative on the ECB’s Governing Council.
“This reflects the strong position of the euro in terms of international exchange. Euro-zone banks and French banks now have at their disposal the security they need to develop their business in renminbi over the long term.”
China has taken steps in recent years to increase international trading of its currency and has been working eventually to make the yuan fully convertible for international transactions.
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According to data collected in April by the Bank for International Settlements, the yuan, or renminbi, is now the 9th most traded international currency in the world, having more than tripled in trades over the past three years to about $120 billion a day.
As China’s second-largest trade partner, Europe is a natural destination for Beijing in raising the yuan’s profile. The 28-nation EU exported 71.4 billion euros of goods to China in the first six months of this year, with imports totalling 133.6 billion euros, according to the latest Eurostat data.
Several European countries though are expected to duke it out to be the main centre of yuan trading in the region.
The Bank of England was the first in a race among European central banks to establish swap facilities with China, establishing a line of 200 billion yuan and 20 billion pounds ($32 billion) in June.
During the same month, French President Francois Hollande also claimed that France was working on setting up a currency swap line with the world’s No. 2 economy, after his country overtook Singapore to be the third highest source of renminbi trading activity.
According to the China Daily, Paris also played a leading role in pushing the ECB into signing the currency swap deal. Yuan deposits in Paris now amount to 10 billion yuan, the second-largest pool for the Chinese currency in Europe after London. Nearly 10 percent of Sino-French trade is also settled in yuan, according to the French central bank.