RMB Bilateral Swap Agreements: how China chooses its partners?

Abstract

As part of the measures taken to foster the internationalization of the RMB, China has signed RMB Bilateral Swap Agreements (BSAs) with a number of countries. Although the Chinese Government has stressed the importance of trade as the key driver of signing RMB BSAs, its validity hasn’t been tested yet. This paper analyzes empirically the key determinants for China to choose its RMB BSA partners. We find that the gravity factors are predominant (closeness to China and a bigger size increase a country’s likelihood of signing an RMB BSA). In addition, closer trade links also have a positive impact on China’s choice of BSA partners, as claimed by the authorities. Institutional strength is not relevant although China does seem to have a preference for countries with a sovereign default history and financial closedness.

Keywords:

• RMB internationalization
• Bilateral Swap Agreements

JEL:

• F33
• F36
• F42

Notes

1. One of our referees argued that Chinese authorities applied other steps for promoting RMB internalization even before the implementation of the Pilot Program, such as allowing RMB deposits in Hong Kong in 2004. However, we treat these early steps as part of special arrangements between China and Hong Kong.

2. As suggested by our editor, we use the five-year average (from 2004 to 2008) of our regression variables for the sake of consistency. We also run regressions using the five-year average values of these variables prior to the signing of RMB BSAs, and obtain consistent results.