Bilateral swap agreement and Renminbi settlement in cross-border trade

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Title: Bilateral swap agreement and Renminbi settlement in cross-border trade
Author: Song, Ke ; Xia, Le
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 19/2019
Year of publication: 2019
Publication date: 20.9.2019
Pages: 28
Subject (yso): ulkomaankauppa; valuutta
Keywords: Bofit-kokoelma; Kiina
JEL: F33; F36; F42
Other keywords: RMB; Bilateral Swap Agreement; Cross-Border Trade; SWIFT
Abstract: This research empirically examines the impact of China’s Renminbi (RMB) bilateral swap agree-ments (BSAs) on the usage of the currency in cross-border trade transactions. By using a unique dataset from SWIFT including cross-border settlement messages of 91 countries/regions between October 2010 and November 2015, we confirm that the signing of a RMB BSA helps to increase the number, the value and the proportion of RMB settlement in cross-border trade. Our results are robust with respect to the choice of different models, including multi-level mixed model, two-stage regression model, and difference-in-difference model. In addition to justifying the effectiveness of China’s BSA-signing strategy to promote the RMB usage in trade settlement, our results clarify that the signing of those RMB BSAs is not purely for China’s political ends as some scholars claim.
Table of contents: Abstract ..4 1 Introduction ..5 2. Background and data ..7 The RMB internationalization and PBoC’s BSA signing ..7 SWIFT Data ..10 3 Empirical results ..11 Performance with and without a BSA ..11 OLS results ..12 Multi-level mixed model ..14 Endogeneity of BSA signing ..15 Non-stationarity of variables ..18 Difference-in-Difference Model ..19 IV regression results ..20 Size of the Swapline ..22 4 Conclusions ..23 Reference ..24 Appendix 1 China’s bilateral local currency swap agreements, as of end-2017 ..25 Appendix 2 Variable definitions and sources ..27

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