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China’s Bilateral Currency Swap Agreement: Strategic Move to Foster Political and Financial Hegemony

Mohammed Ahmed, Abdullahi (2019): China’s Bilateral Currency Swap Agreement: Strategic Move to Foster Political and Financial Hegemony.

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Abstract

ABSTRACT The global financial crisis of 2008 nearly put a halt to China’s export-led and current account surpluses trajectory, in 2007 China’s current account surplus fell from 10% of GDP to about 2% in 2013. This necessitates the internationalization of the Chinese Renminbi to boost trade, investment and hedge against foreign currency risk through bilateral currency swap. In bilateral currency swap, on the trade date, counter parties exchange notional amounts in two different currencies. For instance, one party receives 30 million British pounds while the other receives 3.3 million Chinese Renminbi. This implies a GBP/RMB exchange rate of 1.1, and at the end of the deal they swap again using the same exchange rate. Evidently, the currency bilateral swap agreements signed by the People’s Bank of China and some Central Banks in advanced, emerging markets and developing economies is reinforcing the trend of Renminbi internationalization in global trade. Our empirical results show that Furthermore, the relative trade shares and exports intensity depicts a large positive swing especially for the swap provider, further suggesting that swap line’s primal motive perhaps resolves around the provider country’s self-interest, even though the benefits are substantially symbiotic for the recipient and provider country.

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