Europe and China Target More Currency Exchanges
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The European Union and China have joined forces to increase currency exchanges between the two, bypassing the U.S. dollar.
The European Central Bank and People’s Bank of China began a currency swap late last week aimed at making it easier for currencies to flow between the two bilaterally. The arrangement will make it easier for European and Chinese banks to allow capital flows between one another, and theoretically improve trade and even out currency rates between the euro and the yuan.
The European Union and China have joined forces to increase currency exchanges between the two, bypassing the U.S. dollar.
The European Central Bank and People’s Bank of China began a currency swap late last week aimed at making it easier for currencies to flow between the two bilaterally. The arrangement will make it easier for European and Chinese banks to allow capital flows between one another, and theoretically improve trade and even out currency rates between the euro and the yuan.
“From a Eurosystem perspective, the arrangement serves as a backstop facility to address sudden and temporary disruptions in the renminbi market due to liquidity shortages in euro area banks,” said the ECB in a statement, adding that the move is aimed at creating greater stability in addition to accommodating more exchanges between the two economic areas.
Europe and China have grown more dependent on one another in recent years, with greater trade flowing between the two. “Liquidity providing arrangements contribute to global financial stability and the arrangement with the PBC is a recognition of the rapidly growing bilateral trade and investment between the euro area and China,” the ECB said. The EU currently serves as China’s largest trading partner.
The currency swap began in October 2013, but remained small and experimental. However, in 2015, two tests of the currency swap arrangement have been designed to demonstrate “the ECB’s and the PBC’s operational readiness to activate the swap if needed on the basis of bilaterally agreed operational procedures.”
Yuan Devaluation
The timing of the currency swap coincides with aggressive moves to devalue the Chinese yuan, while liquidity concerns and fears of overly aggressive speculation will threaten the Chinese stock market and the country’s organic economic growth.
China devalued the yuan in August this year, indicating a need to weaken the currency amidst weak economic conditions. Nonetheless, official figures still show GDP growth at about 7 percent for 2015, at the government’s target.
Many independent estimates of China’s GDP indicate that actual growth measures significantly lower, and could prove below 3 percent, according to the most pessimistic estimates.
Euro QE
While the yuan has devalued, an increase in the euro monetary base due to an aggressive quantitative easing program has also pressured the value of the euro, and made European exports more attractive.
The euro has lost 14 percent of its value relative to the US dollar in 2015, reaching its weakest point since 2003.
Nonetheless, the ECB has said it will continue its QE program, which experts estimate will buy 1 trillion euros of bonds through open market activities. However, ECB President Mario Draghi has suggested that Europe will raise the amount of bonds it will buy in 2016, as the Eurozone continues to struggle with anemic growth, high unemployment, and a lack of inflation.
