CBN makes RMB 2.67 billion drawdown under currency swap agreement with PBOC in 2022

📋 Staff Comments

1. A bilateral currency swap (BCS) agreement — also known as a central bank liquidity swap agreement — is an agreement between the central banks of two countries to exchange cash flows in different currencies at predetermined rates over a specified period of time. Central banks participate in these agreements to facilitate bilateral trade settlements using their national currencies (rather than relying upon on a third-party currency such as the U.S. dollar), manage demands from their local banks, and provide liquidity support to financial markets. The party that draws down on the swap line becomes the borrower and the other party becomes lender. During the term of the swap, the party that draws down on the swap line makes either fixed or floating interest payments on the principal amount. If both parties draw down on the swap line, then both parties exchange fixed or floating interest payments on the principal amounts. The 5-step process of drawing upon a currency swap line with the People’s Bank of China (PBOC) can described from the perspective of an importer in a given country (‘Country X’) seeking to settle trade with a Chinese firm in RMB. Step 1: The central bank of Country X and the PBOC activate their currency swap in advance, at which point each party deposits a specific amount of its currency in an account controlled by the other party (i.e. the central bank of Country X deposits local currency in an account controlled by the PBOC, and the PBOC deposits an equivalent amount in RMB in an account controlled by the central bank of Country X). Step 2: A firm in Country X that imports goods from China applies for an RMB-denominated loan from a domestic bank. Step 3: The domestic bank in Country X that receives the loan application then applies to its central bank for an RMB-denominated loan. After a review process, the central bank of Country X notifies the domestic bank applicant that its loan application was approved. The central bank of Country X subsequently requests that the PBOC transfer RMB funds from the central bank of Country X’s swap account within the PBOC to the loan applicant’s account with a corresponding bank in China. Step 4: The domestic bank in Country X directs the corresponding bank in China to transfer RMB funds into a Chinese exporter’s account, and the corresponding bank in China provides RMB funds to the Chinese exporter. Step 5: The importer in Country X repays the RMB-denominated loan at its maturity date. The domestic bank notifies the central bank of Country X of the repayment, and transfers RMB into the central bank’s account within the PBOC through the corresponding bank in China. For the central bank of Country X, the RMB deposit is an asset that should be recorded on its balance sheet as an official reserve asset denominated in RMB. The contra entry of this asset is the liability in the local currency of Country X that represents China’s claims in the central bank of Country X. This should be also recorded on the balance sheet of the central bank of Country X. At the time of the exchange of currencies, it should be recorded as an increase in assets and an increase in liabilities of the monetary authorities in the balance of payments. The reason why the PBOC uses this mechanism to provide renminbi liquidity to other central bank is to increase the speed, convenience, and volume of transactions between the two countries. More detailed information about currency swaps with the PBOC can be found at https://www.imf.org/-/media/Files/Publications/WP/2021/English/wpiea2021210-print-pdf.ashx and https://thechinaguys.com/the-rise-of-the-renminbi-the-reality-of-bilateral-swap-agreements/ and https://www.imf.org/external/pubs/ft/bop/2017/pdf/17-25a.pdf.
2. AidData treats drawdowns under BCS agreements with the PBOC as collateralized loans because, in a BCS arrangement, the currency of the borrower is held as collateral while the lender receives interest on the amount drawn down by the borrower until repayment is made.
3. Most central banks publish their end-of-year outstanding PBOC swap debt, but only a few report detailed transaction-level data on drawdowns during the year. Therefore, if no information on drawings is available, AidData assumes that total drawdowns during the reporting period equal the amount outstanding at the end of the reporting period (and vice versa). Since the (de jure) maturities of PBOC swap drawings are 12 months or less, this creates a lower bound estimate for actual drawdowns under the PBOC swap line.
4. PBOC swap debt is frequently rolled over. In central bank reports where one can only observe the year-end outstanding amount, no distinction between rollovers and drawdowns is possible. In these cases, one can derive (new) drawdowns as the difference between the current and last year’s outstanding swap debt stock. This measure essentially captures net lending through the PBOC swap line.
5. The exact amount drawn is not given in the CBN Annual Report 2022, but a lower bound can be inferred from the amount of RMB that was auctioned off to local banks.
6. One major use of the currency swap, per CBN's Annual Reports, was to facilitate access to the Renminbi in Nigeria. CBN's 2022 Annual Report indicated that '[i]n line with the Bi-lateral Currency Swap Agreement (BCSA) with the People's Bank of China, the fortnightly auction of the Chinese yuan (CNY) at the Retail Secondary Market Intervention Sales (SMIS) window was sustained during the year', which in turn helped 'facilitate business processes for Nigerian firms engaged in direct trade with their Chinese counterparts and improved access to the Yuan in the Nigerian foreign exchange market'. See https://www.cbn.gov.ng/Out/2023/FMD/Financial%20Markets%20Department%20-%202022%20Annual%20Activity%20Report%20(1).pdf

📚 Sources & References

• IMF Working Paper (WP/21/210): Evolution of Bilateral Swap Lines
• Not Signed
• Not Sealed
• Not Delivered
• Nigeria – China Bilateral Currency Swap Agreement: A Cost-Benefit Analysis of the Policy
• CENTRAL BANK OF NIGERIA FINANCIAL MARKETS DEPARTMENT Half-Year Activity Report 2020
• ECONOMIC REPORT FOR THE FIRST HALF OF 2018
• CBN Update ISSN No: 2695-2394 Vol. 3 No. 1 January 2021
• CBN Update ISSN No: 2695-2394 Vol. 2 No. 6 JUNE 2020
• Regulations for transactions with authorised dealers in renminbi
• MPC Communique May 21st and 22nd 2018, 2021 RMB Internationalization Report, “We Will Renew”: CBN Replies Falana on Nigeria-China Currency Swap Deal as Naira Hits N920/$ at Black Market, 15bn Yuan Currency Swap Deal With China Still On Course
• CBN Replies Falana
• CBN replies Falana, says Nigeria’s currency swap deal with China still valid
• CBN To Renew Currency Swap Deal With China
• FINANCIAL STABILITY REPORT – JUNE 2023
• Financial Markets Department
• Annual Activity Report 2018
• Financial Markets Department
• Annual Activity Report 2019
• Financial Markets Department
• Annual Activity Report 2021
• Financial Markets Department
• Annual Activity Report 2022 Loan applications and disbursements are still being received and processed as the projects continue to evolve. Ongoing monitoring and evaluation are in place to ensure project continuity.