BCRA makes RMB 130 billion drawdown under currency swap agreement with PBOC in 2021

📋 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. 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).
5. 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 the Government borrowed $2.4 billion from the PBOC in 2014, which implies that $2.2 billion was borrowed between January 2015 and April 2015.
6. 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, 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.” 7. For evidence that the BCRA can convert the RMB it receives from PBOC into U.S. dollars (USD), see pg. 9 of the BCRA's 2015 financial statements. See https://www.dropbox.com/s/13bbay8z0psekx3/i2015financialstatements.pdf?dl=0 8. 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.
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

• Argentina Asks China to Expand Yuan Swap to Strengthen Reserves
• Chinese Yuan/Argentine Peso Bilateral Currency Swap Agreement between the People's Bank of China and the Central Bank of Argentina
• Estados Contables al 31 de Diciembre de 2021
• IMF Working Paper (WP/21/210): Evolution of Bilateral Swap Lines
• Se convertirán yuanes del swap con China por u$s 3.100 millones 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.