China Focus: Who's Next to Swap Currency With China?

    The move aimed to promote trade and investment to boost economic development, said the central bank.

    ASEAN countries which "suffered from the 1997-98 Asian financial crisis" are more likely to be the next ones to establish a currency swap with China, said Zhao Xijun, professor of finance at the Renmin University of China.

    Chai Yu, director of Institute of Asia-Pacific Studies at the Chinese Academy of Social Sciences, pointed out that a number of countries are willing to sign currency swap agreements with China," especially the eight neighboring countries that had signed currency settlement agreements with China", including Russia and Vietnam.

    WHY CURRENCY SWAPS?

    Many Asian countries and regions had started to focus on regional cooperation to avoid a repeat of the financial crisis that rocked the region in 1997, especially in times of global financial downturn.

    In 2000, ASEAN members, together with China, Japan and South Korea, launched the Chiang Mai Initiative, a network of bilateral currency swap agreements to enhance monetary cooperation.

    "Bilateral currency swap agreements help to keep a stable financial and monetary system and avoid exchange rate risk," said Zhao Xijun.

    The two sides could provide financial aid to each other when facing "short-term liquidity needs", said an unidentified sources with the PBOC.

    The agreements would also enhance bilateral trade by increasing import demand of commodities from the opposite side and saving the exchange cost for the exporters from both sides, said sources.

    Conducting currency swap with other countries shows China's fulfillment of its responsibility amid the global crisis and its contribution to a stable regional currency system, said Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission.

    WHY CHOOSE CHINA?

    "China's trading partners have been confident about the stability of both the yuan and China's economy," said Zhang, noting that China's economy is basically sound with adequate foreign exchange reserves and a stable currency.

    China has been the world's top foreign exchange owner as its foreign exchange reserves climbed 27.3 percent in 2008 to 1.9 trillion U.S. dollars, according to PBOC figures.

    China has also maintained its status as the fastest growing economy despite the fact that its economic growth slowed to nine percent last year, and economists believe that China will be the first to revive from the global crisis.

    "Currency swaps have promoted the use of the yuan in international finance and trade through the recent agreements," Zhao said.

    However, experts also point out that the yuan still has a long way to go to become a new world currency.

    China would consider the current situation of bilateral trade, investment and economic cooperation, as well as the stability of the financial system when picking its next partner, said Chai Yu.

    The three currency swap contracts have an effective period of three years, and both the scale and the length of agreements could be extended upon agreement by both parties, said Chai.