CBR makes RMB 59.7 billion drawdown under currency swap agreement with PBOC in 2023

Staff comments

1. A bilateral currency swap (BCS) agreement — also known as a central bank liquidity swap agreement — is an agreement between the central banks of two countries to exchange cash flows in different currencies at predetermined rates over a specified period of time. Central banks participate in these agreements to facilitate bilateral trade settlements using their national currencies (rather than relying upon on a third-party currency such as the U.S. dollar), manage demands from their local banks, and provide liquidity support to financial markets. The party that draws down on the swap line becomes the borrower and the other party becomes lender. During the term of the swap, the party that draws down on the swap line makes either fixed or floating interest payments on the principal amount. If both parties draw down on the swap line, then both parties exchange fixed or floating interest payments on the principal amounts. The 5-step process of drawing upon a currency swap line with the People’s Bank of China (PBOC) can described from the perspective of an importer in a given country (‘Country X’) seeking to settle trade with a Chinese firm in RMB. Step 1: The central bank of Country X and the PBOC activate their currency swap in advance, at which point each party deposits a specific amount of its currency in an account controlled by the other party (i.e. the central bank of Country X deposits local currency in an account controlled by the PBOC, and the PBOC deposits an equivalent amount in RMB in an account controlled by the central bank of Country X). Step 2: A firm in Country X that imports goods from China applies for an RMB-denominated loan from a domestic bank. Step 3: The domestic bank in Country X that receives the loan application then applies to its central bank for an RMB-denominated loan. After a review process, the central bank of Country X notifies the domestic bank applicant that its loan application was approved. The central bank of Country X subsequently requests that the PBOC transfer RMB funds from the central bank of Country X’s swap account within the PBOC to the loan applicant’s account with a corresponding bank in China. Step 4: The domestic bank in Country X directs the corresponding bank in China to transfer RMB funds into a Chinese exporter’s account, and the corresponding bank in China provides RMB funds to the Chinese exporter. Step 5: The importer in Country X repays the RMB-denominated loan at its maturity date. The domestic bank notifies the central bank of Country X of the repayment, and transfers RMB into the central bank’s account within the PBOC through the corresponding bank in China. For the central bank of Country X, the RMB deposit is an asset that should be recorded on its balance sheet as an official reserve asset denominated in RMB. The contra entry of this asset is the liability in the local currency of Country X that represents China’s claims in the central bank of Country X. This should be also recorded on the balance sheet of the central bank of Country X. At the time of the exchange of currencies, it should be recorded as an increase in assets and an increase in liabilities of the monetary authorities in the balance of payments. The reason why the PBOC uses this mechanism to provide renminbi liquidity to other central bank is to increase the speed, convenience, and volume of transactions between the two countries. More detailed information about currency swaps with the PBOC can be found at https://www.imf.org/-/media/Files/Publications/WP/2021/English/wpiea2021210-print-pdf.ashx and https://thechinaguys.com/the-rise-of-the-renminbi-the-reality-of-bilateral-swap-agreements/ and https://www.imf.org/external/pubs/ft/bop/2017/pdf/17-25a.pdf. 2. AidData treats drawdowns under BCS agreements with the PBOC as collateralized loans because, in a BCS arrangement, the currency of the borrower is held as collateral while the lender receives interest on the amount drawn down by the borrower until repayment is made. 3. The CBR is sometimes also referred to as the Bank of Russia. 4. Prior to 2022, AidData estimated annual drawdown amounts by calculating the difference between the overall size of the currency swap agreement and the ‘unused limit’ under the currency swap agreement (facility) in any given year (as identified in CBR Annual Reports). However, CBR did not identify these ‘unused limits’ in its 2022 annual report or 2023 annual report. 5. Prior to March 2024, CBR borrowed from the PBOC under the currency swap agreement at an interest rate of SHIBOR plus a 2.5% margin. From March 2024 onward, CBR borrowed from the PBOC at an interest rate of SHIBOR plus a 3.5% margin. 6. Most central banks publish their end-of-year outstanding PBOC swap debt, but only a few report detailed transaction-level data on drawdowns during the year. Therefore, if no information on drawings is available, AidData assumes that total drawdowns during the reporting period equal the amount outstanding at the end of the reporting period (and vice versa). Since the (de jure) maturities of PBOC swap drawings are 12 months or less, this creates a lower bound estimate for actual drawdowns under the PBOC swap line. 7. PBOC swap debt is frequently rolled over. In central bank reports where one can only observe the year-end outstanding amount, no distinction between rollovers and drawdowns is possible. In these cases, one can derive (new) drawdowns as the difference between the current and last year’s outstanding swap debt stock. This measure essentially captures net lending through the PBOC swap line. 8. Russia stopped reporting its International Investment Position (IIP) and Balance of Payments (BOP) data to the International Monetary Fund (IMF) after 2021. However, as of January 2025, CBR was still publishing similar data until 2023 on its website (https://www.cbr.ru/eng/statistics/macro_itm/external_sector/pb/p_balance/). The CBR-reported data on external liabilities do not provide a separate category for the central bank alone, but rather a combined category for "Central bank and banks" (see row 382 in the sheet "Years" within the following data file: https://www.dropbox.com/scl/fi/0hmh0bxdvjjss0mb5pgkb/bal_of_payments_standart_e.xlsx?rlkey=herj4s17cdx4eiozwp5d1al2l&dl=0). The net incurrence of liabilities (flows) from "Loans, currency and deposits" in this category is $8.7 billion in 2023, which is similar to the estimated PBOC swap drawdown amount that AidData has captured via Record ID#102322. AidData's estimate of CBR's (gross) PBOC swap drawdown amount in 2023 is also consistent with the outstanding liabilities (stocks) of "Central bank and banks" from "Loans, currency and deposits" reported in CBR's IIP data for 2023, which amounts to around $60 billion (see row 131 in the following file: https://www.dropbox.com/scl/fi/1clpvwhy69w3o2fhozvu3/53e-iip.xlsx?rlkey=90kui9efwix8sdu3v2lbnhxa9&dl=0). 9. The maturity of this agreement is unknown. For the time being, AidData assumes the maturity is one year. This issue warrants more investigation