BCRA makes RMB 130 billion drawdown under currency swap agreement with PBOC in 2023

📋 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 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. Drawdowns under the swap line in 2023 were subject to at least two different maturity periods (6 months and 7 months). AidData has taken the average of the two in order to estimate the average maturity length of all 2023 drawdowns, setting the maturity to 6.5 months (approximately 0.5416-years). However, in its Financial Statements for the Year that Ended on December 31, 2023, BCRA disclosed $18.4 billion in PBOC swap line obligations that were classified as 0–3 month liabilities. On page 57 of the BCRA’s Financial Statements for the Year that Ended on December 31, 2023, it disclosed that '[t]he liability related to the swap agreement with China was classified within the 0 to 3 months group.' See https://www.bcra.gob.ar/Pdfs/PublicacionesEstadisticas/i2023FinancialStatements.pdf]5. 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. This is the case for Argentina.
5. The Central Bank of Argentina (BCRA) reports their end-of-year outstanding PBOC swap debt in US Dollars and Argentine Pesos rather than Renminbi. Per the USD to RMB exchange rate on 12/31/2023 (1 USD to RMB 7.0742, see https://www.exchangerates.org.uk/USD-CNY-spot-exchange-rates-history-2023.html), the reported USD $18,431,806,000 outstanding debt was worth RMB 130,390,282,005.
6. As such, AidData has assumed total drawdowns were made equivalent to at least 130 billion RMB (the maximum drawing rights) in 2023.
7. 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.
8. Multiple sources indicate that BCRA fully utilized the RMB 70 billion ($11 billion) bilateral currency swap with the PBOC in 2014 and 2015. According to a IMF Country Report No. 16/346, '[a]s of end-August [2016], gross reserves were US$31.2 billion amounting to 5.4 months of import cover or 71 percent of the IMF’s reserve adequacy metric. A large part of the reserves (US$11 billion) is from a renminbi swap line with China.' El Cronista, a local media outlet in Argentina, reports (see https://www.cronista.com/finanzas-mercados/Renueva-hoy-el-Banco-Central-el-primer-tramo-del-swap-con-China-20151030-0037.html) that the RMB 70 billion was fully exhausted by BCRA by September 2015, which implies that RMB 55.8 billion was drawn down in calendar year 2015 (since RMB 14.2 billion was drawn down in 2014).
9. According to the IMF Country Report No. 16/69, 'the government negotiated and activated a renminbi swap line with the People’s Bank of China, drawing a total of US$4.6 billion as of late April 2015.' The same report says that BCRA borrowed $2.4 billion from the PBOC in 2014, which implies that $2.2 billion was borrowed between January 2015 and April 2015.
10. According to IMF Country Report No. 18/374, '[o]n December 17, [2018] gross reserves increased by US$8.7bn, reflecting the activation of the augmented BCRA swap with the People’s Bank of China. The augmentation, which was signed during the recent G20 [meeting], brings the total amount of freely available resources under the swap to US$18.7 billion. Gross international reserves moved up to US$58.6 billion.' See https://www.imf.org/en/Publications/CR/Issues/2018/12/19/Argentina-Second-Review-under-the-Stand-By-Arrangement-Financing-Assurances-Review-and-4648511. For evidence that PBOC authorized BCRA to convert 36% of its swap debt (RMB 20 billion out of RMB 55.8 billion in outstanding swap debt in 2015) from RMB to USD, see pg. 9 of the BCRA's 2015 financial statements. See https://www.dropbox.com/s/13bbay8z0psekx3/i2015financialstatements.pdf?dl=012. The December 16, 2015 supplementary agreement can be accessed in its entirety via https://www.dropbox.com/s/lm13xl9qwxcdl5c/Supplementary%20Agreement%20regarding%20the%20Bilateral%20Currency%20Swap%20Agreement%20Between%20PBOC%20and%20BCRA.pdf?dl=0.
11. Information on the authorization of use of RMB 35 billion to offset foreign exchange market operations in 2023 can be found on pg. 65-66 of the BCRA’s Financial Statements as of December 31, 2022. See https://www.bcra.gob.ar/Pdfs/PublicacionesEstadisticas/e2022estadoscontables.pdf14. On page 60 of the BCRA’s Financial Statements as of December 31, 2022, it disclosed that '[a]s a result of the meeting of the presidents of the People’s Bank of China and of the BCRA, on January 8, 2023, the activation of the Currency Swap Agreement between both institutions was confirmed, and they committed to intensifying the use of the RMB (renminbi) in the Argentine market for bilateral exchange. The agreement includes a special use of CNY 35,000,000 to offset transactions in the foreign exchange market. At May 11, 2023, the use of funds amounts to CNY 35,000,000.' See https://www.bcra.gob.ar/Pdfs/PublicacionesEstadisticas/i2022FinancialStatements.pdf15. According to the IMF, 'the activation of the PBOC swap (US$4.9 billion) [...] helped to support balance of payments needs in 2023.' See https://www.imf.org/en/Publications/CR/Issues/2024/02/01/Argentina-Seventh-Review-under-the-Extended-Arrangement-under-the-Extended-Fund-Facility-544313. An earlier (August 2023) report from the IMF indicated that '[t]o help address near-term balance of payments and financial stability needs, the PBOC-BCRA swap line was recently extended for an additional three years to June 2026.' The same report noted that 'the swap line has been activated on several occasions to provide short-term liquidity support, including to support import financing. The equivalent of about US$5 billion was activated in January 2023. As of mid-August, roughly US$3.8 billion of this first tranche has been used to help finance imports (US$1.8 billion) as well as meet debt service obligations to bondholders (US$0.9 billion) and a portion of Fund repurchases in June (US$1 billion). In addition, the PBOC has provided a bridge loan to meet Fund repurchases at end-July. The bridge loan for US$1.7 billion will be repaid upon completion of the fifth and sixth reviews. Activation of a second tranche for an equivalent amount as the first tranche remains a subject of discussion' See https://www.imf.org/-/media/Files/Publications/CR/2023/English/1ARGEA2023002.ashx16. In its August 25, 2023 review, the IMF called the PBOC swap drawing for the late July 2023 repayment to the IMF a 'bridge loan,' in contrast to previous drawings, which it called swap line activations or uses. BCRA said it would use $1.7 billion (roughly RMB 12.4 billion) from its second tranche of the freely available portion of the swap line but, per the IMF, but it had only used roughly $3.8 billion (roughly RMB 27.7 billion) of the first tranche (these funds were used for imports, paying foreign bondholders, and IMF repayments in June 2023), which should have been exhausted before the second tranche could be activated. At the time, the IMF said 'activation of a second tranche for an equivalent amount as the first tranche remains a subject of discussion.' According to Reuters, the PBOC chose to activate the $1.7 billion from the second tranche as a 'bridge loan' specifically for that purpose and for nothing else. According to Reuters, BCRA repaid the PBOC 'bridge loan' with the proceeds from an IMF loan (EFF) disbursement that it received on or around August 23, 2023.
12. One official source (https://www.bcra.gob.ar/Pdfs/PublicacionesEstadisticas/i2023FinancialStatements.pdf) indicates that the bilateral currency swap agreement (or so-called ‘master agreement’) between PBOC and BCRA was renewed for another three years on August 6, 2023 rather than June 2, 2023 (with an expiration date: August 6, 2026). This discrepancy warrants further investigation.

📚 Sources & References

• Financial Statements as of December 31, 2023
• Informe 137 Honorable Cámara de Diputados de la Nación Parte 1
• DIARIO DE SESIONES CÁMARA DE DIPUTADOS DE LA NACIÓN 4a REUNIÓN – 4a SESIÓN ORDINARIA (INFORMATIVA) JUNIO 13 DE 2023 PERÍODO 141
• Argentina renews US $6.5 billion swap with China amid financial restrictions 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.