Small ‘wave’ of currency swap deals.

26 Apr

China is certainly growing strong as an international business partner.

China and Brazil have recently signed a currency swap deal that was first announced last year. The central banks of the two countries will be allowed to swap local currencies worth up to 190 billion yuan or 60 billion reais ($30 billion or £20 billion) and is a pact meant to safeguard against future global financial crisis. Considering that China is Brazil’s biggest trading partner, this sounds like a sound decision by Brazil.

Moreover, Australia’s central bank is planning to invest around 5% of its foreign currency in Chinese government bonds, making it the Reserve Bank of Australia’s first investment in an Asian country’s sovereign bond that is not Japan.

The Bank of England is also in negotiations with China for a three-year currency swap arrangement that can help boost trade between the two countries in the yuan. It is, as chancellor George Osborne said, an ‘important step’, especially because the UK means to be the ‘centre’ for the yuan, as well as ‘cements London as the Western hub for the fast-growing renminbi (another name for the yuan) market’

These currency swap agreements will allow for central banks to settle trade between firms in local currencies other than US dollar, which is standard for today.



2 Responses to “Small ‘wave’ of currency swap deals.”

  1. na8g10 April 29, 2013 at 10:44 am #

    This is certainly not a surprise as for a while now China has seen its economic growth stagnate in recent times with a 7.7% increase in GDP in the first quarter of this year. Most countries would love to have growth this high but China is a different story in a sense that it has been witnessing 10%+ GDP growth over the last three decades so 7.7% is a bad sign for them. Clearly, this article is an indication of one of the steps that China is taking to try and maintain their high growth and with trade being one of their most profitable businesses it is also not a surprise they are focussing on this area as well.

    Australia’s decision to invest 5% of it’ foreign currency in Chinese government bonds is also unsurprising as they’re probably still one of the safest countries to buy securities and bonds from. Due to the financial crisis quite a few countries have been downgraded (most notably the UK and US), but China, having been relatively safe from the crisis, have maintain the highest rating from the ‘big three’ credit rating agencies (Standard & Poor, Moody and Fitch), which still leaves them as a safe investment.


  2. jk10g11 May 15, 2013 at 10:50 pm #

    Many experts see this move as an indication that China is aiming to become a more important and stable player in the field of the World’s Economy. However this opening up the trade is a risky business for China. It means that the country might lose its grip on the currency. It has not yet, but there are hopes that the country might fully liberalise its currency in the next years. These hopes and discussions have however been prominent for at least the last decade.

    The benefits for China would be: It would reduce the exchange risks and make borrowing from international capital institutions easier. Furthermore, it would give China an even more extensive role as a global player.

    There are however, also setbacks to this plan. A fully liberalised currency would mean that
    China would lose its control over its capital, the Yuan could gain and loose in value incredibly rapidly and china could not intervene as easily anymore concerning the imports and exports of goods in order to help local firms.

    Since the Financial crisis in2008 the positives begin to out weight the negatives and that China is actively considering taking the risk of liberalised currency over the risk of continuing to stay attached to the US Dollar. Nonetheless, most financial experts argue that China will therefore only fully liberalise the Yuan when it is confident to have the right measurements in place to secure its economy.

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