Pakistan, China Currency Swap Agreement to promote, enhance bilateral trade, opportunity to significantly increased investment

Karachi: Governor, State Bank of Pakistan Yaseen Anwar says landmark Currency Swap Agreement CSA with Peoples Bank of China signed on December 23, 2011 represents “a significant achievement for both governments to promote, enhance not only bilateral trade but also opportunity to significantly increase investment in Pakistan going forward.”

In a statement Thursday, Anwar said CSA has been executed for a tenor of 3 years in respective local currencies, Pakistan Rupee 140 Billion & Chinese Yuan 10 Billion. It is second CSA SBP signed, first with Central Bank of Turkey on Nov. 1, 2011. “While these are strictly bilateral arrangements, precise terms and conditions of each of these CSAs are confidential between two Central Banks; however, a close scrutiny of information available in public domain indicates that principal objective is to promote use of regional currencies for trade settlement purposes and specifically in case of China, to enhance role of Chinese Yuan in international trade, investment. China’s concurrent Yuan local currency settlement program is also consistent with underlying currency swap objectives. Pakistan, China CSA also reflects similar objectives of promoting trade and investment in bilateral currencies,” he added.

Objective of swap is to promote bilateral trade, finance direct investment between two countries in their respective local currencies and any other ‘purpose’ as mutually agreed between two central banks. Since CSA is a bilateral financial transaction, all terms & conditions apply equally to both countries. Pricing is based on standard market benchmarks which are widely acceptable in respective domestic markets of both countries.

Anwar said both Central Banks will have ability to draw on swap line any time during tenor of swap. SBP can purchase CNY from PBC against its local currency PKR, and repurchase its local currency with same CNY on a predetermined maturity date and exchange rate. Similarly PBC can also purchase PKR against CNY. Standard market pricing will apply on date of utilization. Like any swap, pricing is linked to interest rates differentials between two currencies. However, drawing under swap line by either central bank will be contingent on bilateral trade being denominated in local currencies, or financing of direct investment between two countries.

CSA will give positive signal to the market on availability of liquidity of other country’s currency in onshore market. This means that for example, SBP will have ability to draw on swap line and provide Chinese Yuan to banks in Pakistan. Banks will on lend this liquidity to importers/ exporters involved in trade denominated in Yuan. At maturity, importer/exporter will repay foreign currency to lending bank; and bank will repay to respective central bank. Trade financing regulations in foreign currencies are already available in Pakistan for providing liquidity and facilitating trade. Same concept will also apply in case of PBC borrowing PKR for trade or investment in Pakistan.

On maturity date of letter of credit (LC), importer will pay off overseas supplier by borrowing in CNY. Assuming borrowing is for 6 months, importer will save on rupee cost and after six months importer will buy CNY against PKR and pay off CNY loan. Availability of onshore CNY financing will encourage importers to open CNY denominated LCs. Once contract is established, exporter will borrow in CNY, sell CNY against PKR and utilize PKR for its local operations. On maturity date of contract, exporter will receive CNY from overseas buyer and payoff CNY loan locally.

SBP Governor said same concept will apply to PBC drawing PKR against swap line and lending same to banks in China. China has significant investments in various projects in Pakistan and Rupee proceeds of swap can be channelized to such long-term projects in Pakistan via Chinese banks. Concurrently with arrival in Pakistan of Industrial Commercial Bank of China ICBC, largest bank in China (and the world in terms of Capital), CSA provides a strong boost towards building offshore investor confidence that will encourage other investors to capitalize on economic opportunities in Pakistan.

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