Currency swap with China helps businesses

The Currency Swap facility between Reserve Bank of New Zealand (RBNZ) and the People’s Bank of China (PBOC) would help in settling trade transactions between businesses in either country, Deputy Governor Grant Spencer said.

An April 18 announcement said the two central banks had agreed on the Reciprocal Currency Arrangement and that the swap facility, valued at $5 billion (RMB 25 billion) will be in force for three years.

The Agreement will facilitate RBNZ to borrow RMB for use in rare situations where financial market disruption makes it difficult for businesses to access RMB to settle transactions with Chinese businesses, he said.

Mr Spencer said the arrangement followed recent initiatives of the PBOC to facilitate the settlement of transactions conducted by firms in RMB.

“While there is no need to use the facility right now, it is useful to have this capacity if markets were ever to become dysfunctional. In addition this swap line would contribute to improving New Zealand-China relationship,” he said.

A currency swap is a foreign-exchange agreement between two parties to exchange aspects (principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency.

Currency swaps are motivated by comparative advantage and is distinct from a central bank liquidity swap.

Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps. However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.

Many other countries have swap facility with PBOC.

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