China: Central Bank Swap to Hong Kong Monetary Authority, 2009

The PBOC aimed to promote renminbi-denominated trade settlement in Hong Kong and promote financial stability in Hong Kong and the region (Cao 2022; HKSAR 2009; HKMA 2009; PBOC 2009a; Wang 2009). In 2020, the HKMA said that the purpose of the (2009) swap line was to promote renminbi trade in Hong Kong (HKSAR 2020). In October 2010, the HKMA activated the swap line for RMB 20 billion, to support renminbi trade settlement after renminbi demand exceeded the conversion quota of the Bank of China Hong Kong—at the time the only official trade settlement clearing bank. For further information about the quota and the Bank of China Hong Kong’s role in renminbi conversion, see Appendix A. The authorities said that the swap line was not needed, but its use “ensured market confidence” (HKMA 2011a; HKMA 2011b; Maziad and Kang 2012).

On December 19, 2008, the central government announced 14 monetary and fiscal measures to support Hong Kong’s economy and financial stability, including a swap line with the HKMA. The PBOC and HKMA signed a bilateral currency swap agreement on January 20, 2009. Other measures announced included encouragement of mainland branch office development in Hong Kong and the advancement of numerous infrastructure projects (HKSAR 2009; HKMA 2009; PBOC 2009a).

On March 12, 2009, the PBOC announced the establishment of a multicurrency payments arrangement with Hong Kong (PBOC 2009b). On March 16, 2009, the PBOC and HKMA signed a memorandum of understanding with respect to a cross-border payment interoperability arrangement (Wang 2009). On June 29, 2009, the PBOC and HKMA signed a second “supplementary memorandum of co-operation” on the cross-border payment arrangement (Holland 2009). In July, the central government officially announced the renminbi trade settlement pilot scheme. In August, mainland banks issued two floating-rate renminbi bonds in Hong Kong, and in October, the central government Ministry of Finance issued RMB 6 billion in sovereign bonds in Hong Kong (IMF 2009).

The PBOC-HKMA swap line was part of—and the largest within—a network of six swap lines that the PBOC made available to other central banks during the Global Financial Crisis in 2008–09 (Bank Negara Malaysia 2009; Dow Jones 2009; Webber 2009; Xinhua News n.d.; Xinhua News 2009). Figure 5 shows the sizes of swap lines extended by the PBOC to various central banks around the world in 2008 and 2009 and compares them to the amount of Chinese exports to those countries. The size of a country’s swap line (represented by the y-axis) closely tracked the value of Chinese exports to that country (represented by the size of the bubbles). In other words, the larger the exports from China to the recipient country, the larger the swap line.

The HKMA maintained a network—of which the PBOC was a member^FOther members included Australia, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, and Thailand (HKMA n.d.a).—of regional US Treasuries–backed bilateral currency repurchase lines since 1996 (HKMA n.d.a; Whai 1996). Under the facility, the PBOC could purchase US Treasury securities from the HKMA—providing the HKMA with renminbi liquidity—and agree to sell them back at a later date; likewise, the HKMA could purchase from the PBOC, reversing the arrangement (HKMA n.d.a; HKMA 2011b).

On March 24, 2010, the Chiang Mai Initiative Multilateralization (CMIM) came into effect, establishing a network—of which the PBOC and HKMA were members—of short-term US dollar swaps (HKMA 2011b). (For a discussion of the CMIM, see Hoffner 2023.)

Figure 6 shows Hong Kong’s international liquidity lines from 2008–2010.

The PBOC’s enabling law gives it the authority to issue the renminbi, dictate and implement monetary policy, regulate foreign exchange markets, and engage in “relevant international financial activities” (Law of the PRC on the PBOC 2003, art. 4). Any nonmonetary policy decisions must be approved by the State Council, China’s highest administrative governing body^FThe State Council is the equivalent to China’s executive cabinet; the head of the State Council is the premier, who is commonly the second most powerful member of the ruling Chinese Communist Party. It is primarily in charge of running the “day-to-day affairs of the state” (Wright 2015, 32). (Law of the PRC on the PBOC 2003).

Section 3 of the Exchange Fund Ordinance (the Ordinance) authorizes the creation of the Exchange Fund and delegates authority over that fund to the Financial Secretary (LegCo 2019, sec. 3[1]). The Ordinance authorizes the Financial Secretary “with a view to maintaining Hong Kong as an international financial centre, [to] use the Fund as he thinks fit to maintain the stability and integrity of the monetary and financial systems of Hong Kong” (LegCo 2019, sec. 3[1A]). Section 3 of the Ordinance authorizes the Financial Secretary to use the Exchange Fund to enter into foreign exchange transactions and “any financial arrangement that he considers appropriate” (LegCo 2019, sec. 3[2][a]-[b]). Section 5A of the Ordinance stipulates that the Financial Secretary shall appoint a Monetary Authority and section 5B authorizes the Financial Secretary to delegate powers conferred or imposed under the Ordinance to the Monetary Authority (LegCo 2019, sec. 5[A]-[B]).

The State Council approved the 2022 conversion of the PBOC-HKMA swap line into a standing agreement and the increase in its size from RMB 500 billion/HKD 590 billion to RMB 800 billion/HKD 940 billion (Cao 2022). In the absence of the swap agreement, further governance details were unavailable.

Neither the PBOC nor the HKMA provided details regarding the low-level management of the swap line.

The PBOC and HKMA announced the swap line in similarly worded press releases on January 20, 2009. Both press releases said that short-term liquidity support—both for Chinese banks operating in Hong Kong and Hong Kong banks operating in China—and the expansion of renminbi-based trade were primary goals of the swap line. The press releases did not include details with respect to the administration, governance, fees, or other details; and the text of the swap agreement was not included in the announcement (HKMA 2009; PBOC 2009a).

In its 2010 annual report, the HKMA said that it had activated its PBOC swap line “for facilitating trade settlement business” (HKMA 2011b). In a working paper, two IMF economists said that “although no banks actually needed to tap RMB funding through the swap agreement, its activation as a precautionary measure ensured market confidence” (Maziad and Kang 2012).

In its press release database, the HKMA included PBOC swap line press releases under the category “RMB Liquidity Facility” among press releases about the RMB Liquidity Facility (HKMA n.d.b). The HKMA made public daily usage data for its RMB Liquidity Facility through an application programming interface (a data query tool) (HKMA 2023).

The HKMA was the only institution eligible for this specific bilateral swap line, but the PBOC extended a number of central bank swap lines in 2008–09 (see Key Design Decision No. 2B, Part of a Package).

In 2009, the PBOC authorized RMB 200 billion for a term of three years (HKMA 2009; PBOC 2009a). The PBOC and HKMA renewed the swap line in 2011, 2014, 2017, and 2020. In 2022, they upgraded it to a standing facility with an RMB 800 billion cap (HKMA 2011a; HKMA 2014c; HKMA 2017a; HKMA 2020b; HKMA 2022a). (See Figure 1 at Overview.)

We were unable to access the swap agreement and thus were unable to uncover details of the implementation process. Usually, a standard swap agreement involves the borrowing central bank exchanging its own currency (or a “hard” reserve currency) for an equal amount of the lending central bank’s currency; the two banks then swap back the currencies at a future date (McDowell 2019; Perks et al. 2021). In other PBOC swap line cases, the borrowing central bank would request a draw on the swap line and make a purchase transaction of renminbi with local currency, which it would later unwind with a repurchase transaction of its local currency with renminbi (Arnold 2023a; 2023b).

In its 2010 annual report, the HKMA said that it had activated its PBOC swap line “for facilitating trade settlement business” (HKMA 2011b). In October 2010, as a result of higher-than-expected demand for cross-border trade settlement, the Bank of China Hong Kong—at the time the only official trade settlement clearing bank—reached the RMB 8 billion quota for renminbi conversion. As a result, offshore renminbi liquidity dried up and the onshore-offshore spread^FThe renminbi can be traded in mainland China (quoted as CNY) and offshore in overseas exchange centers (historically Hong Kong and Singapore) (quoted as CNH). Since the onshore renminbi exchange rate is more tightly controlled by the PBOC, the onshore-offshore spread is sensitive to demand fluctuations in offshore markets (Maziad and Kang 2012). began to widen (Maziad and Kang 2012). In response, the HKMA preemptively activated its PBOC swap line for RMB 20 billion (which represented 10% of the swap cap at the time) to promote market confidence (HKMA 2011a).

In 2012, the HKMA announced the creation of the RMB Liquidity Facility, which it said would “make use of the currency swap arrangement between the [PBOC] and the HKMA” (HKMA 2012b). The Facility was funded from draws on the HKMA’s swap line with the PBOC (Cockerell and Shoory 2012). The RMB Liquidity Facility provided renminbi funding for a tenor of one week at an interest rate benchmarked to market rates against eligible collateral (which comprised bills and notes from the Exchange Fund, HKSAR government bonds, and Hong Kong–issued renminbi-denominated Chinese government bonds); the facility imposed haircuts on collateral^FApplicable haircuts were 5% for securities with a maturity of 1 year or less; 10% for securities with a maturity of 1–5 years; and 20% for securities with a maturity of more than 5 years (HKMA 2012a). (HKMA 2012a).

In November 2014, the HKMA announced a new Intraday Repo under the RMB Liquidity Facility, through which the HKMA began to offer intraday renminbi funding of up to RMB 10 billion to authorized institutions in Hong Kong. Under the Intraday Repo, the HKMA would provide overnight renminbi funding against an expanded list of eligible collateral^FThe HKMA expanded eligible collateral to include renminbi-denominated bonds issued by Chinese policy banks in Hong Kong (for a list of those banks, see Appendix B) (HKMA 2015a). for a fee benchmarked to market overnight rates^FIn its daily RMB Liquidity Facility usage data, the HKMA presents the Facility as comprising three distinct facilities: (1) the Intraday Repo, (2) the Overnight Repo, and (3) the PLP Facility (HKMA 2023). (HKMA 2015a; HKMA 2015b). For details of the RMB Liquidity Facility and Intraday Repo as of the November 2014 announcement, see Appendix B.

On the same day it announced the Intraday Repo, the HKMA announced the designation of seven CNH primary liquidity providers (PLPs), which pledged to expand their market-making roles in offshore renminbi products markets in exchange for a dedicated RMB 2 billion repo facility (per institution). The HKMA said the designation scheme was “an important step for further enhancing the infrastructure for the offshore renminbi market in Hong Kong” (HKMA 2014). Among the seven entities designated was the Bank of China Hong Kong,^FAs of September 2014, the Bank of China Hong Kong was providing intraday renminbi overdraft services to banks participating in renminbi-clearing business in Hong Kong (Chan 2014). Then chief executive of the HKMA Norman Chan said that the HKMA’s RMB Liquidity Facility would provide intraday repo services “in addition” to the overdraft services being provided by the Bank of China Hong Kong (Chan 2014). the same bank that in 2010 reached its renminbi-conversion quota, triggering the first draw on the HKMA-PBOC swap line (HKMA 2014b). The HKMA reviewed its list of designated PLPs every two years. Figure 7 shows the PLPs.

Since we were unable to access the swap agreement and information about specific swap draws, we were unable to determine the duration of draws under the swap.

Neither the PBOC nor the HKMA publicly disclosed information about rates or fees.

Since we were unable to access the swap agreement, we were unable to determine any specific balance sheet protection measures. The PBOC in 2009 maintained foreign currency reserves worth more than five times total Chinese external debt. In 2008, the PBOC pegged the renminbi to the US dollar, after which it remained stable against the US dollar in 2009 (Treasury 2009; World Bank 2022b). A standard swap agreement involves the borrowing central bank exchanging its own currency for an equal amount of the lending central bank’s currency; the two banks then swap back the currencies at a future date—in essence, the borrowing central bank’s currency acts as collateral against the loaned currency (Perks et al. 2021). In other PBOC swap lines, the PBOC held the counterparty central bank’s currency as collateral.^FFor example, see Arnold 2023a; Arnold 2023b.

Since we were unable to access the swap agreement, we were unable to determine which, if any, restrictions applied to the PBOC’s swap line to the HKMA.

We were unable to uncover other options considered by the PBOC to provide renminbi liquidity to the HKMA. However, the PBOC and HKMA maintained two other international liquidity lines from 2008 to 2010 (see Key Design Decision No. 2C, Part of a Package).

The swap line had an original three-year term but was renewed by both banks in 2011 (HKMA 2009; HKMA 2011a; PBOC 2009a). After multiple additional renewals, the line was converted to a standing facility in 2022 with an RMB 800 billion cap (State Council 2022). (See Figure 1 at Overview.)