RMB Found Its Way into Europe

After celebrating the 64th birthday of PRC， China saw its project of currency swap meet a milestone deal.

On October 10， the People’s Bank of China （PBOC） said that the bank reached an agreement with the Europe- an Central Bank （ECB） about swapping RMB 350 billion with 45 billion euros as approved by the State Council.

Apart from the U.S. Federal Reserves， the ECB is the most influential central bank in the world as it is called the “central bank of the world”. Early in this June， the PBOC once signed an agreement with the Bank of England. Therefore， the PBOC has already signed the agreements of exchanging currencies with two of the three most influential central banks in the world. The only exception is the U.S. Federal Reserves.

“It has a great significance. The euro is the most the influential currency in the world， only next to the U.S. dollar，” says Zong Liang， deputy director of the PBOC’s financial research center. The conclusion of the agreement shows that the RMB is now highly regarded in the world at this moment.

Benoit Coeure at the Executive Board of ECB says that the swapping between RMB and euro shows that the RMB is climbing up fast in the position in the international monetary world.

The Milestone of Currency Swap

The ECB announces that the agreement of currency swap， from the perspective of the eruo system， is considered as a standby fluidity tool and a safeguard measure for the continuous supply of RMB for banks in the Euro Zone.

Any country joining the currency swap can inject the currency of its partner into its own financial system and provide the domestic commercial institutions with the access to the partner’s currency for the payment of commodities imported from the partner. In that way， exports enterprises in the bilateral trade can efficiently avoid the exchange rate risk and lower the cost in currency exchange since they are directly paid with their home currency.

The PBOC says that the currency swap deal between it and the ECB can provide more fluidity support for the further development of the RMB market in Europe. It can facilitate the usage of RMB in the overseas markets， as well as the convenience for the trade and investment.

On October 10， the PBOC also disclosed more details about the conclusion of the currency swap deal with the ECB.

As of the start of 2013， the PBOC and ECB arranged several negotiations about the currency swap between RMB and euro. In the regular meeting of the Bank for International Settlement in September 2013， Zhou Xiaochuan， president of PBOC， and Christine Lagarde， president of ECB， came to an agreement. After that， the two parties spent several days approving the relevant documents and procedures， which finally led to the conclusion of the deal.

The ECB is headquartered in Frankfurt， Germany. It was founded on June 1， 1988. It is responsible for the financial and monetary policies of European Union in Euro Zone， shouldering the tasks of keeping the stability of the currency， managing the dominant exchange rate， as well as the reservation and issuance of the currency.

“The ECB is the administrative body of the euro and is headquartered in the euro zone， an important economy in the world. The currency swap deal opens the doors of several EU coun- tries for RMB，” says Zong Liang. The present currency system in the world is dominated by the U.S. dollar. The currency swap deal between China and EU can improve the balance among all important currencies in the world.

In Zong Liang’s opinion， the deal is good for both China and Europe. “The agreement can improve Europe’s skill of preventing financial risk by further increasing the amount of capital – once there were problems， the relevant RMB accounts could be used to offset the influence.” For China， it is a milestone for the internationalization of RMB.

Facilitation for RMB Internationalization

The present international currency system uses the U.S. dollar as the reserve currency and settlement currency. With this， the U.S. can not only gain a lot from the seigniorage， but also make the U.S. Federal Reserves’ monetary policy influence the monetary polices in the world. More importantly， the U.S. dollar is immune to problems of other currencies， but when the problem happens to the U.S. dollar， the entire world has to share the pain.

As the world’s second largest economy， China needs to drive the internationalization of RMB to completely avoid the predicament in the long-term viewpoint.

In recent years， RMB is expanding its scope of use in the world following the order of peripheral areas as first and then the global market. More and more countries have signed the currency swap agreements with China. The increasing number of the countries and the increasing amount of the value of the agreement have been creating opportunities for the internationalization of RMB.

Before the agreements with ECB and Bank of England， it also reached an agreement with Bank of Japan， which was an important step for the internationalization of RMB in Asia.

When the free convertibility of RMB is not fully implemented， the currency swap can somewhat drive the RMB forward to realize the functions of pricing， settlement and reservation. The expansion of currency swap can increase the sphere of circulation of RMB and is good for the internationalization of RMB.

Sun Lijian， vice dean of Economic School at Fudan University， says that the internationalization of RMB should be“from inside to outside”， meaning that the pivot of RMB internationalization should be the construction of a powerful overseas settlement and payment system of RMB.

In his opinion， the construction of an overseas settlement and payment system of RMB must be promoted even though it only depends on the power of the offshore financial market and the expansion of the bilateral currency swap. From that perspective， China should encourage the development of the RMB offshore trade center to build a grand overseas payment system of RMB with the overseas assistance recruited.

U.S. Federal Reserve as the Next Target？

In 2013， the PBOC apparently accelerates the currency swap of RMB.

Before the agreement with ECB， it reached currency swap agreements with seven countries in the year of 2013.

These seven central banks or monetary authorities include the Monetary Authority of Singapore， Central Bank of Brazil， Bank of England， Central Bank of Hungary， Bank of Albania. Central Bank of Iceland and Bank of Indonesia. The value of these deals ranges from RMB 2 billion to RMB 300 billion.

A f t e r a w i d e expansion， the U.S. Federal Reserves is the only large central bank that has not dealt currency swap with China. Is it the next target？

Prof. Tu Yonghong from Renmin University of China says that it is very unlikely for the PBOC and the U.S. Federal Reserves to reach a similar agreement.

It is because that the currency swap is based on the actual demand but the U.S. and China do not have such a demand at this moment. The U.S. is not haunted by the lack of fluidity of U.S. dollar. If it needs RMB， it can directly buy it from the market. China， which has a large amount of USDbased foreign exchange reserves， is not in short of the U.S. currency.

Presently， the U.S. dollar enjoys an unparalleled position in the global currency system. Several years ago， the U.S. council founded an independent commission， which said after investigations that RMB can challenge the USD’s leading position in ten years.

“China is active and sincere when it comes to the currency swap deal with the U.S. But the U.S. might hesitate due to the worry that the internationalization of RMB might affect the position of U.S. dollars in the world，” says Zong Liang. In his opinion， it is rather difficult for the PBOC and the U.S. Federal Reserves to sign the agreement of currency swap. In spite of that， many people are still optimistic about the outlook of RMB internationalization.

A report from HSBC shows that the RMB has already been widely recognized in the world as 48% of enterprises know well about RMB. HSBC forecasts that RMB is expected to become one of three major cross-border trade settlement currencies in the world.