BOM makes RMB 12 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. For loan and debt rescheduling records with variable interest rates, AidData calculates the all-in interest rate at T0 based on the reference rate (such as LIBOR or EURIBOR) on the loan start date, plus any known margin. Please see the methodology for additional details.
4. In July 2017, Deputy Governor of the Bank of Mongolia, B. Lkhagvasuren, said ‘Mongolia has used 70 percent of the [RMB} 15 billion. But China has only spent MNT 500 million. Therefore, it is important to focus on increasing the usage of MNT in China.’5. The IMF, in their October 2023 Article IV Consultation report, includes the Government of Mongolia’s PBOC swap borrowings in its measure of public debt: 'The public debt concept used in [our] analysis comprises the general government, a state-owned bank (Development Bank of Mongolia), public-private partnerships, and a US$1.8 billion (12 percent of GDP) swap line between the People's Bank of China (PBOC) and the Bank of Mongolia (BOM), which has been rolled over in 2023 for another 3-years.' The World Bank, on the other hand, chooses not to include liability under the swap line in their measure of public debt in a November 2023 report. See https://www.imf.org/en/Publications/CR/Issues/2023/10/04/Mongolia-2023-Article-IV-Consultation-Press-Release-and-Staff-Report-540108 and https://thedocs.worldbank.org/en/doc/aebdd3a2c3fb72b341d2d65d2e8c1845-0070012023/original/Mongolia-Economic-Update-Nov-2023.pdf respectively. The same October 2023 IMF report also includes draw downs under the PBOC swap line in their estimates of gross official reserves.
5. According to the World Bank and IMF, BoM's liabilities under the swap line were worth 10% of Mongolia's GDP in 2022.
6. More extensive comments by Citi in their January 2024 report regarding the BoM/PBoC swap line are as follows: 'BoM […] paid down RMB1.5bn or US$210mn of used PBOC swap line [between October 1, 2023 and December 31, 2023]. According to the central bank, this amount was drawn down from the swap line between 2011-2016, and the payment was made ahead of time. This transaction line 1 has been closed and four other lines remain. Reducing the usage of the RMB swap line has always been one of the recommendations from IMF, and with the flexibility of no external sovereign debt payment due in 2024 and 2025, we see further moves on this front as possible – even if this will slow the increase in official FX reserves accumulation – as this is also critical to sustainably rebuild external buffers.' See https://www.dropbox.com/scl/fi/migem6n3a4f4ro3p3h1en/Extract-from-January-2024-Citi-report.docx?rlkey=lciz316rzwbkk7e835f0mis0h&e=2&dl=0.
7. 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.
8. 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.

📚 Sources & References

• Mongolia: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Mongolia
• ThE BANK OF MONGOLIA ANNUAL REPORT 2021
• Bank of Mongolia Annual Report 2022
• The Bank of Mongolia and the People’s Bank of China renew the Bilateral Currency Swap Agreement
• Extract from January 2024 Citi report
• Mongolia’s Fiscal and Export Outperformance Likely to be Temporary, 2023 RMB Internationalization Report
• Government of Mongolia 2020 Bond Prospectus
• Mongolia’s total external debt amounts to USD 29.7 billion
• IMF Working Paper (WP/21/210): Evolution of Bilateral Swap Lines
• IMF Press Release No. 17/193: IMF Executive Board Approves Financial Arrangement for Mongolia
• Beijing is taking on a broader financial role. Here’s why that matters.
• Annual Report 2020
• Annual Report 2019
• Annual Report 2018
• International Debt Statistics 2021, 7th roundtable meeting between central banks of Mongolia and China being held
• Annual Report 2017
• Annual Report 2015
• Annual Report 2014
• Annual Report 2013
• Annual Report 2012
• Annual Report 2011
• MONGOLIA 2023 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT (Country Report No. 2023/348)
• Assessment Letter for the Asian Development Bank
• May 2024 MONGOLIA ECONOMIC UPDATE 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.