Jul. 22, 2014 (TSR) – The People’s Bank of China (PBC) and the Swiss National Bank (SNB) on Monday have signed a direct currency swap agreement worth 150 billion yuan, or 21 billion Swiss francs ($24.17 billion) to provide “liquidity support for the bilateral economic and trade activities and maintaining financial market stability”, according to Chinese officials.
Hailed as an important step by the Swiss Finance Ministry, the two central banks are now able to purchase and re-purchase their currencies which will also provide “liquidity support for the further expansion of RMB market in Switzerland and facilitate the use of RMB beyond Chinese borders”.
“The swap agreement is a key requisite for the development of a renminbi market in Switzerland,” the SNB said according to Nasdaq.
“The agreement is valid for three years and can be extended with mutual consent”, the People’s Bank of China statement said.
“The signing of the local currency swap agreement represents fresh progress in the Sino-Swiss cooperation in monetary and financial fields and will help promote trade and investment facilitation”, the statement added.
Signed in Beijing by the Governor of PBC, Zhou Xiaochuan and the Chairman of SNB Board, Jordan Thomas, the deal also grants the Swiss a renminbi investment quota of up to CHF2 billion (15 billion renminbi), which it can use to invest part of its foreign-exchange reserves in the Chinese bond market. The additional clause will help the SNB to diversify its foreign-exchange reserves which have swelled to almost CHF450 billion.
Renminbi Internationalisation Kills U.S. Dollar
As part of its effort to revamp the country’s financial system, the Chinese government has been pushing for a greater role for the yuan on the world stage over the past five years.
Since 2009, China has signed direct currency swap agreements with European Central Bank, Albania, Hungary, Brazil, Singapore, Russia, Malaysia, United Arab Emirates, Thailand, South Korea, Turkey, Japan, Australia, Indonesia, Iceland, Uzbekistan, Argentina, Hongkong, Belarus, Mongolia, Kazakhstan, Pakistan, New Zealand, and Ukraine.
In June 2013, United Kingdom became the first G-7 country to set up an official currency swap line with China.
Competition is fierce among Europe’s major financial centers to trade in China’s currency. Frankfurt and Luxembourg are vying with London, the favorite of many analysts, Reuters said.
Switzerland is also courting China for the hub position as we reported earlier this month. Finance Minister Eveline Widmer-Schlumpf and China’s central bank governor, Zhou Xiaochuan, had bilateral talks in Switzerland where they discussed Swiss plans in becoming a renminbi hub to assist its rise as an international reserve currency. Since that time, the two countries sped up efforts to establish a renminbi-Swiss franc direct swap line and bypassing U.S. dollar, which was not expected until later this year.
The next meeting to foster dialogue is scheduled in China next year.
The financial talks, a free trade agreement in force since the beginning of July, and a revised double taxation agreement will strengthen bilateral economic and financial relations, a statement said.
Switzerland and China have been holding regular talks to boost financial cooperation since last December.
Analysts say London looks best placed to become Europe’s main offshore yuan center, given its role as the world’s biggest foreign-exchange hub, according to Reuters.
Backed by gold, the Red Back has already overtaken the Euro as the second-most widely used currency in global trade as of December 2013 according to Society for Worldwide Interbank Financial Telecommunication. The Renminbi (RMB) is virtually a shoe-in to reach second place by 2016.
Such major new currency exchange deals which allow direct conversions of these countries’ currencies into Chinese renminbi has great repercussions on the dominance of the U.S. dollar, the source of America’s “power” and “status”.
Prior to these direct swap deals the Chinese had to convert their renminbi to U.S. dollars and then convert those American dollars to local currencies to buy a particular country’s goods.
This deal cuts out the middle man, the United States, and eliminates the need for each country to maintain large dollar holdings.
How big of a deal is this really?
For instance, the little country of New Zealand: During 2013, trade between China and New Zealand totaled $18.2 billion, up 25.2% from the previous year, making the Mainland New Zealand’s top destination for exports.
That is nearly $20 billion U.S. dollars that these countries don’t need, which China and New Zealand gain, U.S. lost — annually.
The first free trade agreement between the Switzerland and China, which took effect earlier this month, is worth more than $26 bn. Direct exports from Switzerland to China account for $22.8 bn in that deal. This deal cements that double-digit billion loss to USA.
Furthermore, China is no longer interested in building up foreign-exchange reserves, which totaled a record $3.66 trillion at the end of September 2013, meaning no more buying U.S. Dollars.