Milestone in Europe deal

Currency swap will help spur internationalization of renminbi

The landmark currency swap agreement between China and Europe is a significant step toward the renminbi's internationalization and will better facilitate trade, investment and financial activities denominated in the Chinese currency in the euro area, analysts say.

The People's Bank of China and the European Central Bank have established a three-year currency swap agreement with a maximum value of 350 billion yuan (42 billion euros; $57 billion), the largest the PBOC has signed with a foreign central bank outside of Asia, higher than the 200 billion yuan agreement with the Bank of England.

As China's second-largest trade partner, Europe is a natural destination for Beijing to boost the greater use of its currency in the area, analysts say.

The ECB said in a statement that the agreement has been established in the context of rapidly growing bilateral trade and investment between the euro area and China. The currency swap is intended to serve as a backstop facility to ensure the yuan's liquidity and financial stability in the euro area.

"The agreement showed that the ECB is very interested in contributing strongly to the internationalization of the renminbi," says Arnaud de Bresson, chief executive of Paris Europlace, a professional association that promotes Paris as an international financial center.

Analysts said the currency swap is a reflection of the increasing demand for the Chinese currency in financial transactions in the euro area and may boost yuan business in Europe.

"The agreement will help streamline financial transactions between the two areas and better facilitate investment, trade and financial activities in renminbi and strengthen the renminbi liquidity in the euro area," De Bresson says.

"It will help accelerate the development of financial instruments denominated in renminbi including account management, savings, cash management, lending and project financing, bond-issuance in renminbi."

Philippe Mongars, deputy director of the market operation department at the Bank of France, says the amount of the currency swap is significant and it serves as a crucial assurance of renminbi liquidity in the euro area.

"All the banks based in the euro area will benefit from it and we see it as a backstop to maintain confidence in the Chinese currency in the euro area," he says.

"What is also important to bear in mind is that the arrangement is bilateral so it is also a reassurance for banks in China when they need to access the euros."

China has in recent years accelerated efforts to raise the global profile of its currency. Since 2008, the country has signed currency swap agreements with 23 regions and countries, with the total value reaching 2.48 trillion yuan, says the PBOC.

The yuan has become the world's eighth most-traded currency with a market share of 1.5 percent and has overtaken the Swedish krona, the South Korean won and the Russian ruble, according to a recent report published by the Society for World Interbank Financial Telecommunications.

It is expected that one third of China's total trade will be settled in yuan by 2015, making it one of the top-three global trade settlement currencies by volume, the bank says.

Meanwhile, renminbi-denominated foreign direct investment almost tripled last year, while outward renminbi investment rose 50 percent, implying that international acceptance of the currency has started to extend from trade settlement to investment, the report said.

Paris played a leading role in pushing the ECB to sign the currency swap agreement, as France has been keen on developing its capital into a major yuan-trading center.

"Banks in the euro zone and France will henceforth have the security they need to develop their activities in renminbi over the long term," Bank of France Governor Christian Noyer said in a statement, welcoming the currency agreement between China and the EU.

Yuan deposits in Paris amount to 10 billion yuan, making the French capital the second largest pool for the Chinese currency in Europe after London. Nearly 10 percent of Sino-French trade is settled in yuan, according to the French central bank.

"French and European companies present in Paris including small and medium-sized enterprises will now be able to denominate their transactions directly in the Chinese currency. This will be an important competitive factor for them vis--vis their trading partners and manufacturers in China," De Bresson says.