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The (Ineffective) Financial Statecraft Of China`s Bilateral Swap Agreements

Most of the world`s currencies are not international. They are volatile, expensive to borrow and lack an issuer with sufficient economic firepower. A policy like that of the Fed or the PBoC would not have a significant effect if it were carried out by most other central banks. But if the country was already close to the thresholds, fiscal policy can cause the economy to exceed them, leading to the emergence of an international currency. We also find that the effect excludes payments to and from China. Swap lines encourage countries around the world to make greater use of the renminbi in trade with each other, the hallmark of an international currency. The effect is maintained; indeed, the effect after three years is greater than that of one year of signature of the agreement. Keywords: China, renminbi, international currency, swap lines Chart 3 Renminbi payment share before and after signing a swap line In 1912, the United States was the largest exporter in the world, but the dollar was not very widespread internationally. U.S. companies have used London`s financial markets to access loans denominated in pounds sterling. This situation began to change with the Federal Reserve Act of 1913.

U.S. banks were allowed to travel abroad and the new central bank pledged to maintain exchange rate stability. The first president of the Federal Reserve Bank of New York (FRBNY), Benjamin Strong, had the explicit goal of making the dollar an international currency. It succeeded because the dollar was widespread in the 1920s and became the dominant currency at the end of World War II. Through numerous policies, he helped create a liquid secondary market in New York for dollar-denominated commercial acceptances, loans used to finance international trade. It was particularly important to allow banks to discount these acceptances by the Federal Reserve, which made the Fed a lender of last resort for international trade in US dollars (Eichengreen et al. 2017). Figure 1 Share of the renminbi in global payments and PBoC swap lines The theoretical results of the thresholds and the presence of zeros in the data make it interesting to consider the large margin: does the swap line make a country more likely to use the renminbi? Figure 3 shows what happens to the use of the renminbi for the medianland in the months around a swap line agreement.

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