BOM makes RMB 2.1 billion drawdown under currency swap agreement with PBOC in 2012

In May 2011, the Bank of Mongolia (BOM) and the People’s Bank of China (PBOC) signed an RMB 5 billion (MNT 1 trillion), three-year bilateral currency swap agreement to facilitate trade and improve foreign currency liquidity in Mongolia. The agreement was amended in March 2012 to expand the scale of the swap from RMB 10 billion. Then, in August 2014, a new three-year swap agreement was signed by the parties, again expanding its scale to RMB 15 billion. The currency swap agreement was extended again in June 2017 for an additional three years, and it was further extended in 2020 for another three years. According to the BOM, it made (gross) drawdowns under the currency swap agreement worth approximately RMB 12 billion during calendar year 2021, RMB 12 billion during calendar year 2020, RMB 12 billion during calendar year 2019, RMB 12 billion during calendar year 2018, RMB 12 billion during calendar year 2017, RMB 12 billion during calendar year 2016, RMB 11.5 billion during calendar year 2015, RMB 9 billion during calendar year 2014, RMB 6 billion during calendar year 2013, and RMB 2.1 billion during calendar year 2012. All of these borrowings carried an interest rate of SHIBOR plus a 2% margin (200 basis points). The GOM’s 2012 drawdown, which has an unknown maturity length, is captured via Project ID#89420. Its 2013 drawdown, which has a 6-month maturity length, is captured via Project ID#89421. Its 2014 drawdown, which has a 6-month maturity length, is captured via Project ID#89422. Its 2015 drawdown, which has a 4.5-month maturity length, is captured via Project ID#89423. Its 2016 drawdown, which has a 5-month maturity length, is captured via Project ID#89424. Its 2017 drawdown, which has a 6.5-month maturity length, is captured via Project ID#89425. Its 2018 drawdown, which has a 7.5-month maturity length, is captured via Project ID#89426. Its 2019 drawdown, which has a 7.5-month maturity length, is captured via Project ID#89427. Its 2020 drawdown, which has a 7.5-month maturity length, is captured via Project ID#95804. Its 2021 drawdown, which has a 12-month maturity length, is captured via Project ID#95805. According to the BOM, the (principal) amount outstanding under its PBOC swap line was RMB 0 in 2011, RMB 2.1 billion in 2012, RMB 6 billion in 2013, RMB 9 billion in 2014, RMB 11.5 billion in 2015, RMB 12 billion in 2016, RMB 12 billion in 2017, RMB 12 billion in 2018, RMB 12 billion in 2019, RMB 12 billion in 2020, and RMB 12 billion in 2021. BOM has described its PBOC swap as a key tool to deal with balance of payments pressures, and according to the IMF, the ‘PBOC swap is […] medium-term balance of payments support to help shore up gross reserves.’ The PBOC’s commitment to renew its swap line with BOM in 2020 for an additional three years also played an important role in enabling the IMF’s Extended Fund Facility for Mongolia (which aimed to stabilize Mongolia’s external position and restore debt sustainability).

Additional details

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 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. AidData has estimated the all-in interest rate by adding 2% to the average 6-month SHIBOR rate (4.52%) in 2012. 4. In July 2017, Deputy Governor of the Bank of Mongolia, B. Lkhagvasuren, said ‘Mongolia has used 70 percent of the [RMB} 15 billion. But China has only spent MNT 500 million. Therefore, it is important to focus on increasing the usage of MNT in China.' 5. 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. 6. 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.

Number of official sources

14

Number of total sources

17