China accelerated plans to internationalise its currency yesterday by agreeing to swap euros and yuan with the European Central Bank in a deal that is set to be China's second largest to date.
The bilateral currency swap agreement between the European Central Bank and the People's Bank of China is valid for three years and has a maximum size of CNY 350 billion or EUR 45 billion.
The deal is the latest of a string of currency swaps that China has created with other nations to promote usage of the yuan in global commercial and financial transactions, with the ultimate goal of rivalling the dollar as a reserve currency.
Mr Louis Kuijs an RBS economist in Hong Kong said that "The emphasis is on renminbi internationalization.' He said currency swaps also provide central banks with additional liquidity in times of financial emergencies, though this function is of secondary purpose in China's swap agreements.
The swap deal with the ECB is China's second-biggest with a foreign central bank, after South Korea's 360 billion yuan swap line. China also has a 400 billion yuan swap agreement with Hong Kong.
As China's second largest trade partner, Europe is a natural destination for Beijing in raising the yuan's profile. The interest is reciprocated by some European nations such as Britain and Germany which want to be the clearing centre for the yuan in Europe and provide what may be a lucrative financial service.