China, Hong Kong Central Banks Agree on Currency Swap

By Li Yanping and Belinda Cao

Jan. 20 (Bloomberg) -- China’s central bank and the Hong Kong Monetary Authority agreed on a 200 billion yuan ($29 billion) currency swap to help ease cash shortages and bolster the city’s role as a foreign-exchange hub.

Hong Kong’s central bank will have access to Chinese yuan from the People’s Bank of China for three years whenever the city needs “short-term liquidity support,” China’s central bank said in a statement today from Beijing. The deal will also promote yuan-denominated trade between Hong Kong and the mainland, the PBOC said.

China’s Premier Wen Jiabao said yesterday the mainland will help the city maintain economic growth and financial stability. Finance ministers from 13 Asian nations, including South Korea, Japan and China, agreed in May to create a pool of at least $80 billion in foreign-exchange reserves to be tapped to protect their currencies.

The latest arrangement “reflects China’s determination to support and maintain financial stability in Hong Kong,” said Ding Zhijie, deputy dean of finance at Beijing’s University of International Business and Economics. “It is also part of China’s efforts to use Hong Kong as a bridgehead to promote the yuan as an international currency.”

Hong Kong’s economy is suffering its first recession since the severe acute respiratory syndrome, or SARS, epidemic in 2003 as exports and domestic demand slow. The economy shrank a seasonally adjusted 0.5 percent in the third quarter from the previous three months, after contracting 1.4 percent in the second quarter.

Expand Yuan Business

“The agreement can help in multiple ways,” Joseph Yam, the HKMA’s Chief Executive Officer, said after signing the accord today in Beijing. It can help “provide financial stability and meet cashflow needs, and expand yuan business.” He said there is no timetable for trade settlements in the yuan.

China has the world’s largest currency reserves of $1.95 trillion, while Hong Kong’s amount to $182.5 billion. The Hong Kong dollar’s peg to the U.S. currency held firm in the past year as regional currencies declined, led by the South Korean won and India’s rupee.

The HKMA sold the local currency in the past three months to prevent it from strengthening beyond its fixed exchange rate, which has been kept at about HK$7.8 per U.S. dollar since 1983. The Hong Kong dollar was little changed at HK$7.7572.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.netBelinda Cao in Beijing at lcao4@bloomberg.netNipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net