China’s Bilateral Currency Swap in International Trade Clearance: An Empirical Investigation

ABSTRACT The emerging economic prosperity of China and its increasing economic integration with the rest of the world as the second largest economy seems to give her an edge to amplify its global competitiveness. An important avenue for this ongoing debate relates to the diversification of the international monetary system. In effect, the development reveals a pertinent reason to expect that the world’s currency regime and global financial architecture is changing. Evidently, the currency bilateral swap agreements signed by the People’s Bank of China and some central banks are reinforcing the trend of Renminbi internationalization. The thesis applies gravity model to investigate China’s Renminbi bilateral swap agreements (BSAs) and trade flows. Lie beside the fore mentioned objective; we empirically investigate the decision of countries to engage in currency swapping through China’s RMB swap route, using large panel data of over 200 countries from 1979 - 2013 for the first time to the best our knowledge. The empirical results show that currency swap as an emerging trade-type of international agreement is trade creating with a magnitude relatively close to what is documented in the literature for other kinds of trade agreements like the currency unions and free trade agreements, this may potentially provide bilateral trade preference for countries that embrace China’s currency swap line.