The European Central Bank (ECB) and the People’s Bank of China (PBOC) agreed to establish a bilateral currency swap line, bolstering access to trade finance in the euro area and strengthening the international use of the yuan.

The swap line will be valid for three years and have a maximum size of 350 billion yuan ($57 billion) when Chinese currency is provided to the ECB and €45 billion ($61 billion) when money is given to the PBOC, the Frankfurt-based central bank said in an e-mailed statement on Thursday.

The arrangement is available to all Eurosystem counterparties via national central banks, it said.

The swap arrangement has been established in the context of rapidly growing bilateral trade and investment between the euro area and China, as well as the need to ensure the stability of financial markets, the ECB said.

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.

PBOC governor Zhou Xiaochuan pledged on 28 June to expand cross-border use of the yuan, also known as the renminbi, and encourage multinational companies to include the currency in their asset portfolios.

“China will allow direct trading between the yuan and foreign currencies and push for more convertibility without giving up control of capital flows," Zhou said.

‘Wider flexibility’

It’s a reflection of the increasing bilateral trade and a measure to accompany China’s push for wider flexibility in the exchange rate, said Stefan Schneider, chief international economist at Deutsche Bank AG in Frankfurt.

China is integrating itself more and more into global financial markets and such agreements are part of that.

The Bank of England was the first in a race among European central banks to establish swap facilities with China, when it agreed on a line of 200 billion yuan and £20 billion ($32 billion) in June.

China, the world’s second-largest economy, already has similar agreements with countries including Australia, South Korea and Malaysia.

The ECB’s swap line is smaller than initially anticipated. Frankfurt Main Finance, a lobby group based in Germany’s financial capital, said in July that the facility may be as much as 800 billion yuan.

‘Significant amount’

Frankfurt is basing its push to become an offshore trading centre for yuan on Germany’s close ties with China, the nation’s third-biggest trading partner.

The two countries imported and exported goods and services worth €144 billion between them last year, according to the federal statistics office in Wiesbaden, Germany.

The swap agreement with the ECB is for a very significant amount, Christian Noyer, France’s representative on the ECB’s Governing Council, said in a statement. This reflects the strong position of the euro in terms of international exchange.

Euro-zone banks and French banks now have at their disposal the security they need to develop their business in renminbi over the long term.

The Governing Council will discuss technical modalities and their communication in due course, the ECB said. BLOOMBERG

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