Pakistan hopes to increase currency swap quota with China
According to a Reuters report on April 26, 2025, the Pakistani Minister of Finance revealed that Pakistan has submitted a request to China to increase the existing currency swap quota. He also stated that he expects Pakistan to issue "Panda Bonds" (RMB denominated bonds issued by overseas institutions in the Chinese market) before the end of the year. On the sidelines of the International Monetary Fund and World Bank spring meetings in Washington, he said in an interview with Reuters that Pakistan currently has a currency swap quota of about 30 billion yuan and hopes to increase the swap quota to an ideal target of 40 billion yuan. In addition, Pakistan has made positive progress in issuing "panda bonds" and hopes to achieve its first issuance within the year.
1、What is currency swap?
Currency swap, also known as "currency swap" or "currency exchange", refers to a financial transaction in which two parties exchange the principal of different currencies according to pre agreed conditions within an agreed period, and exchange their respective principal at the agreed exchange rate upon expiration. Simply put, it is the exchange of debt or assets between two different currencies. This exchange involves the payment of interest, and the purpose of both parties in the transaction is to obtain the currency they need or to avoid exchange rate risks. For example, suppose we are doing trade with Argentina, and the needs and pain points of both sides are as follows: 1. China needs to import a large amount of beef from Argentina, but Argentine beef traders only charge pesos (foreign currency); 2: Argentina needs to purchase electronic and photovoltaic products from China, but Chinese manufacturers only accept Chinese yuan. The traditional approach is to settle through the international currency "US dollar", but this approach has a clear drawback of high transaction fees, which require both parties to pay high exchange costs (about 1%, depending on the bank), and may also result in losses due to exchange rate fluctuations. If currency swaps are introduced, only 3 steps are needed. Step 1: China signs an agreement with the Central Bank of Argentina to exchange equivalent currencies at the current exchange rate (assuming the exchange rate is 1:50 and the exchange rate is 3%). For ease of understanding, let's assume that we lend Argentina 100 yuan and Argentina lends us 5000 pesos; Step 2: After the exchange, both parties' traders can use this money for free buying and selling. Argentines can pay 100 RMB for one small photovoltaic product from our country. Step 3: After one year, Argentina will return us 100 yuan plus 3 yuan in interest (based on the previous interest rate); We will refund Argentina 5000 pesos+150 pesos interest (as above).
2、What is the operating principle of currency swap?
The operating principle of currency swaps is based on the theory of comparative advantage. Different countries and enterprises have different comparative advantages in different currency markets. Therefore, through currency swaps, all parties can utilize their respective advantages in the currency market to obtain the required funds at a lower cost.
Currency swaps involve two main steps: initial exchange of principal, and periodic exchange of interest and principal. At the initial exchange, both parties exchange their respective currencies at the agreed exchange rate. In the subsequent regular exchange, both parties will pay interest according to the agreed interest rate and exchange their respective principal back at the agreed exchange rate upon the expiration of the exchange period.
3、Why do other countries and regions sign currency swap agreements with us?
Taking Argentina as an example, 1: Currency swaps can stabilize the import and export supply chain. Currently, 60% of Argentina's industrial intermediate goods rely on imports from China and are settled in RMB to ensure the supply of key commodities, especially in countries and regions that are sanctioned or at war. At the same time, we also need agricultural and sideline products from Argentina. Calculating in Argentine currency not only yields better benefits, but also helps to increase the international share of the Chinese yuan. 2: Insufficient foreign exchange reserves and high pressure to settle in traditional US dollars. According to data from the Argentine Ministry of Economy, as of February 2025, Argentina's debt to international institutions reached 75.552 billion US dollars; According to local media reports, Argentina needs to pay up to $1.9 billion in interest to the IMF in 2025, and there are also several batches of government bonds denominated in US dollars that will mature within the year. At the same time, the country's foreign exchange reserves fell to $24.677 billion at one point, with a shortfall of about $50 billion. In such a situation, currency swap is clearly the only option. On the other hand, through multiple currency swap agreements, China can further reduce its holdings of US bonds and safeguard its economic interests. 3: The currency swap agreement also provides an alternative to foreign exchange reserves for economically fragile countries, easing short-term liquidity crises and stabilizing Argentina's relatively fragile economy to avoid financial crises. For example, when Argentina's foreign exchange reserves dried up this time, the Chinese yuan became an important support.
4、Risk Management of Currency Swap
Although currency swaps have many advantages, there are also certain risks involved. Effective risk management is crucial for ensuring the smooth progress of currency swap transactions. Here are several key risk management points:
1. Credit risk management: Both parties to the transaction should assess each other's credit status to ensure that they can fulfill their obligations under the swap agreement on time. This involves examining the credit rating and historical performance records of the counterparty.
2. Market risk management: Currency swaps involve changes in exchange rates and interest rates. Both parties to the transaction should closely monitor market trends, assess exchange rate and interest rate risks in a timely manner, and take corresponding hedging measures.
3. Liquidity risk management: In some cases, it may be difficult for one party to find a counterparty in the market to close a currency swap transaction. Therefore, both parties to the transaction should ensure that the currency in the swap agreement has good liquidity.
4. Legal and Compliance Risk Management: Currency swap transactions involve laws and regulations from multiple countries and regions. Both parties to the transaction should ensure that the transaction complies with relevant laws and regulations to avoid risks arising from compliance issues.
In summary, currency swaps, as an important international financial derivative tool, play an irreplaceable role in promoting international trade, investment, and financial stability. By deeply understanding and exploring the basic principles of currency swaps, enterprises and financial institutions can better utilize this tool to optimize their capital structure, reduce financing costs, and avoid exchange rate risks. Regulatory agencies should also closely monitor the development dynamics of the currency swap market, strengthen supervision and risk prevention, and ensure the healthy and stable development of the market.
