Source: WSJ – BOE, PBOC Agree on Currency Swap
The Bank of England and the People’s Bank of China said on Saturday they had reached a three-year deal to swap sterling and yuan when needed, the first such agreement between China and a member of the Group of Seven largest developed economies, and a move that should help the U.K. realize its ambition to turn London into a major offshore hub for trading the yuan.
Swap lines typically allow banks to access foreign currency in times of crisis. The BOE has such arrangements with the Federal Reserve, European Central Bank, Bank of Japan and other central banks that can be called on if liquidity in financial markets dries up.
Bankers say a swap line with China’s central bank would help facilitate yuan trading in London by ensuring banks have access to plentiful central bank funds in either currency. British policy makers are determined to promote London as a major offshore hub for trading yuan, and reinforce its position as an international financial center at a time when competition is growing from cities such as New York and Frankfurt to take its business.
The BOE and PBOC said the value of currencies swapped could not exceed 200 billion yuan ($32.6 billion). The agreement was signed by BOE Governor Mervyn King and PBOC Governor Zhou Xiaochuan.
“It is a testament to the outstanding working relationships between the Bank of England and the People’s Bank of China (PBoC) that this swap line has now been signed,” said Mr. King. “The establishment of a sterling/renminbi swap line will support U.K. domestic financial stability. In the unlikely event that a generalized shortage of offshore renminbi liquidity emerges, the Bank will have the capability to facilitate renminbi liquidity to eligible institutions in the U.K.”