Last updated: October 10, 2013 10:57 am

European Central Bank and China strike currency swap deal

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A Bank SinoPac employee counts yuan banknotes in a bank branch in Taipei, Taiwan, on Wednesday, July 17, 2013. Taiwan should remove restrictions on mainland China’s companies and its currency so the island can become an offshore hub for the yuan, SinoPac Financial Holdings Co. said©Bloomberg

The European Central Bank and the People’s Bank of China have established a currency swap agreement, the latest in a string of moves to help encourage global use of the renminbi.

The swap line, at Rmb350bn ($57bn), will be China’s third largest after its facilities with Hong Kong and South Korea, and follows similar agreements with the UK, Australia and Brazil.

“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 statement.

Although the arrangement is intended to serve as a backstop, and therefore may not be needed most of the time, the deal has symbolic importance, and reflects the growing trade between eurozone countries – especially Germany – and China.

China is the EU’s second biggest trading partner, with about €1bn of trade between the two each day, according to the European Commission.

The PBoC said in a statement: “This can help provide liquidity support for the development of the renminbi market in Europe and promote overseas use of the renminbi, and it is also beneficial for facilitating trade and investment.”

Deutsche Bank expects about 15 per cent of China’s total trade to be settled in renminbi this year, up from almost nothing a few years ago.

“Today’s agreement is another major step forward in the renminbi’s internationalisation process, even though the size appears to be smaller than some initial estimates,” said Ju Wang, FX strategist at HSBC, in a report. “Importantly, this announcement comes ahead of China’s third plenary session in November when other foreign exchange reforms could surface.”

Aside from the use of the renminbi for trade settlement, the Chinese currency is becoming increasingly important for investors, with daily trading volume doubling so far this year.

Data released by Swift, the payments company, showed that London has been increasingly dominant as the centre for trading offshore renminbi, with its share of the market outside Hong Kong growing from 54 per cent in January to 62 per cent now.

French authorities have been keen to bring more renminbi trading to Paris, although the city currently accounts for just 10 per cent of trading.

Speaking to the China Daily back in April, Christian Noyer, governor of the Banque de France, said an ECB-PBoC swap line “would encourage the use of the renminbi beyond China’s borders in the European timezone, as an invoicing currency for trade and as an investment currency”.

The agreement would allow European companies with renminbi-denominated bills to turn to the ECB for liquidity if they could not find it on the market. While the ECB has yet to publish technical details, this would probably take place at market rates plus a small mark up. It would also enable China’s central bank to provide up to €45bn in liquidity inside the mainland.

Chinese authorities have been keen to diversify away from the US dollar. On Thursday, Sinopec became only the second mainland company to raise euro-denominated debt, although bankers expect more deals to follow.

Additional reporting by Michael Steen in Frankfurt and Simon Rabinovitch in Shanghai

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