Swiss/China swap deal opens yuan

The Swiss National Bank and the People’s Bank of China agreed to establish a bilateral currency swap line, bolstering access to trade finance in the Swiss franc (CME:S6U14) and strengthening the international use of the yuan (CME:QTU14).

The agreement allows the two central banks to purchase and repurchase as much as 150 billion renminbi ($24 billion) over the next three years, the Zurich-based central bank said today. The PBoC has also granted the SNB an investment quota of 15 billion renminbi for the Chinese interbank bond market.

China is loosening exchange-rate controls in an overhaul of its $9 trillion economy. At the same time, Swiss banks are pushing for the country to become a center for yuan trading in Europe, as they are faced with the prospect of the loss of banking secrecy for offshore clients,

“The swap agreement is a key prerequisite for the development of a renminbi market in Switzerland,” the Swiss central bank said, adding that the quota for the Chinese bond market will allow the SNB’s foreign-currency reserves to “be diversified even further.”

The SNB has amassed nearly 450 billion francs ($500 billion) worth of foreign-exchange reserves as a result of its campaign to keep the franc weaker than 1.20 per euro (CME:E6U14).

“It’s a big step for both countries,” SNB President Thomas Jordan told Swiss public broadcaster SRF in a radio interview broadcast today. “It’s in our interest, in the interest of Switzerland, that we invest our currency reserves in China.”

Diversified Holdings

As of the end of the first quarter, the SNB held 47% of its reserves in euros, 27% in dollars and 8% in yen, with the rest invested in currencies including the Korean won. The majority of its holdings were in highly rated government bonds, with 15% in equities.

The Swiss finance ministry in Bern said in a statement it “expressly” welcomed the step.

China started pushing for the wider use of the yuan outside the mainland in 2010. Germany’s Bundesbank and the Bank of England signed deals with the PBOC earlier this year. China’s yuan overtook the euro to become the second-most used currency in global trade finance after the dollar, the Society for Worldwide Interbank Financial Telecommunication said in late 2013.

Geneva is a major trade-financing hub, and Switzerland’s free-trade agreement with China came into effect earlier this month. Switzerland is the second European country after Iceland to have signed such a deal.

Today’s agreement is a “positive step,” Martin Maurer, secretary general of the Association of Foreign Banks in Switzerland, said by telephone. His organization has called for Swiss banks to increase their role in yuan financing. “It’s extremely important in light of the FTA.”

Thanks to the FTA, China agreed to cut tariffs on Swiss watches, machinery and chemical imports from companies including Swatch Group AG and robot-maker ABB Ltd.’s Swiss unit. China will overtake Germany as Switzerland’s biggest export market by 2035, according to a survey by Credit Suisse Group AG.

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