beyondbrics

If China is going to promote the renminbi as a currency for trade settlement, then it has make sure its trade partners have….well, renminbi, right? Since 2008, the People’s Bank of China has been orchestrating a number of currency swaps with other central banks. Monday’s news that Beijing has agreed a RMB7bn ($1.08bn) currency swap deal with Kazakhstan has beyondbrics thinking it’s time to do a round-up of who’s who in the yuan trading club.

The idea behind these swaps is to provide “seed money” for its trade partners so that trade can be conducted in an alternative currency – read: renminbi – instead of the US dollar.

As the table drawn by HSBC from PBoC and CEIC data shows, some of Beijing’s choices for swaps – namely Hong Kong, South Korea and Malaysia – are a no-brainer given the level of bilateral trade and investments.  But others – like Belarus and Iceland – just look plain odd.

Or not.

If you are Beijing and you want to promote the renminbi as a trade and ultimately a reserve currency – why not target countries that are a bit of a basket case?

In the case of both Belarus and Iceland – both of which have suffered an economic meltdown and were forced to sharply devalue their currencies – it is hardly a coincidence that the swap amount agreed far outstrips the amount of trade these countries have with China.

It’s a win-win situation for everyone involved. Iceland and Belarus get to flog off their battered kronas and roubles for the stability of the mighty yuan – which is widely expected to appreciate in value. China, in turn, gets to boast that its currency is being kept as a reserve currency in more countries, even if they are small and vulnerable. In the same way that Beijing would offer countries like Zimbabwe soft loans in return for not recognising Taiwan, China, through its currency swaps with Belarus and Iceland, is reaping political benefits at a very minor cost.

Kazakhstan fits squarely in the Korea group, not the Iceland/Belarus squad. It is an increasingly-active trade and investment partner for China, as well as for Russia, India and the European Union.

It is therefore entirely logical, in economic terms as well as political, that Astana and Beijing should increase collaboration over currency.

As Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission, told Xinhua back in in 2009:

Conducting currency swaps with other countries shows China‘s fulfillment its responsibility amid the global crisis and its contribution to a stable regional currency system. China’s trading partners have been confident about the stability of both the yuan and China’s economy.

So it will only be a matter of time before beyondbrics has to extend its list.

Related reading:
RMB internationalisation file, beyondbrics
Yuan for all?, Lex
China: First Argentina, then the world, Alphaville
Latin America ponders role of the renminbi, FT
China wants the world to spend more renminbi, beyondbrics