China Inks Currency Swap Deal With Hungary (Sep 2013)

Renmimbi-Yuan

Source: ICBC – Swap Deal Inked with Hungary

Notable excerpts:

The People’s Bank of China (PBC) signed a currency swap deal with the central bank of Hungary Monday, marking China’s latest step to raise the global profile of the renminbi.

According to a notice published on the PBC’s official website, the maximum value of the three-year swap is 10 billion yuan ($1.63 billion)/375 billion Hungarian Forint ($1.65 billion), which can be extended if both countries agree. The deal is aimed at strengthening bilateral financial cooperation, facilitating trade and investment and maintaining regional financial stability, the note explained.

This is a move to promote the internationalization of the yuan,” Zhou Yu, an analyst specializing in international finance at the Shanghai Academy of Social Sciences (SASS), said in a telephone interview Tuesday with the Global Times.

Despite the agreement’s stated goals of fostering trade and investment between Hungary and China, Zhou cautioned that results along these lines were not likely to emerge immediately.

“I’ve talked with fellow researchers in countries that China has opened currency swap lines with and many of them say that these deals function like central bank swaps. This type of arrangement can provide a country’s currency with liquidity support abroad during periods of market stress,” explained Zhou.

Among the 21 swap agreements that China has signed since 2009, most are still used as tools to hedge against risk or solidify the yuan’s position in key financial centers, Zhou added.

Hungary is the second European country to open a currency swap line with China – the first such deal was struck between China and Britain in June. Previous agreements had been brokered mainly between China and its major trading partners, including Australia and Brazil. Including the line with Hungary, China’s currency swap agreements involve an accumulated 2.2 trillion yuan, central bank figures show.

Since currency swaps help mitigate exchange rate risk in times of volatility, they indirectly promote international trade settlement and investment, Zhou pointed out.

The renminbi is now the ninth most widely used currency in trade settlement, a Bank for International Settlements report revealed last week.

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