The European Central Bank (ECB) yesterday concluded a currency swap agreement with the People's Bank of China (PBoC) aiming to promote rapidly growing bilateral trade and to ensure the stability of financial markets.
The deal will establish a reciprocal three-year currency swap line between the euro and Chinese yuan, also known as renminbi, with a maximum size of 350 billion yuan and €45 billion.
The three-year deal follows a similar arrangement agreed between the UK and China earlier in June, with a maximum value of 200 billion yuan. (See: UK, China reach £21-bn currency swap deal)
The present agreement is the result of talks between ECB and PBoC for the past few months.
''From the perspective of the Eurosystem, the swap arrangement is intended to serve as a backstop liquidity facility and to reassure euro area banks of the continuous provision of Chinese yuan,'' the ECB said in a statement.
''It has been established at the level of the Eurosystem and will be available to all Eurosystem counterparties via national central banks,'' the ECB said.
The Chinese yuan currently trades directly with the US and Australian dollars and the Japanese yen.
It is one of the top-10 most traded international currencies. According to Bank of International Settlement data, trading in yuan has more than tripled over the past three years to $120 billion a day in 2013.
The swap line with the ECB is one of China's largest currency swap deals. It is higher than Singapore's 300 billion yuan swap line and the 200 billion deals with Britain, Australia and Brazil but lower than Hong Kong's 400 billion.
Annual trade between Europe and China is approximately €480 billion and the European Union is China's biggest export market.
Starting with South Korea in 2008, China has over 2 trillion yuan worth of currency swap agreements with around 20 countries and regions, including Hong Kong, Singapore, Malaysia, Thailand, Kazakhstan, Pakistan, Australia, New Zealand, Brazil and Argentina among others.
These arrangements are aimed at encouraging China's trade partners to use the yuan as a kind of foreign reserve and diversify the currency in the country's foreign reserves.
Economists believe that the Chinese currency swap lines are part of the country's measures to internationalise its currency, although bottlenecks remain due to Beijing's tight financial regulations. Although China has never indicated when the yuan would be made convertible, some believe that it could be even as early as 2015.
Currency swap facilitates central banks to purchase and repurchase currencies from one another, which makes it easier for banks in the country to increase liquidity in financial markets at the time of crises.
India last month expanded its currency swap agreement with Japan from $15 billion to $50 billion to strengthen bilateral financial cooperation and stablilise the financial markets.