Since the financial crisis of 2008 China has been signing agreement after agreement with other sovereign nations for bilateral currency swaps. China and these other nations are trying to diversify their central bank foreign – exchange reserves out of U.S. Dollars. China would like its currency, the Renmimbi, to play more of an important role in the world financial system. Here is a list of the fourteen nations that have already signed bilateral currency swap agreements with China.
After the collapse in 2008 Chinese exporters were finding it difficult to do international trade as they were unable to settle their deals with Yuan (Renmimbi) and were forced to settle in Dollars. The currency swap agreements will make it easier for now for international companies and traders to receive financing in Yuan during difficult economic periods. If they can settle their deals in Yuan (Renmimbi) it would reduce their risk. China and these nations would like to keep trade flowing even in the event of another financial crisis.
What is a Currency Swap? Essentially a currency swap is a transaction between two nations to exchange the interest and principal payments on loans issued by two different nations. The two countries gain access to foreign exchange reserves. This limits the nations exposure to exchange rate fluctuations because they can pay back the liability associated with its currency instead of in Dollars.
Why is China so concerned about the U.S. Dollar? China has grown suspicious of the US government unwillingness to curb its spending and printing of its currency. This runaway printing has and will continue to devalue it dollar-denominated assets. Recently we are hearing that the US Federal Reserve will quietly implement QE3 (Quantitative Easing 3).
China would like the world to look upon its currency as a store of value similar to Gold and the Dollar. This privilege has given the US the ability to expand and borrow. China would also like this ability. If nations hold reserves in Yuan (Renmimbi) it is extending credit to the Chinese government. These currency swaps are the first steps in Yuan (Renmimbi) transforming in to a global currency. How many more countries will sign agreements with China in 2012? How will the USA and the IMF react? I look forward to seeing the results of China spreading its influence.