A Currency Swap Arrangement (CSA), the central banks of Pakistan and China had signed some 17 months ago, has come into effect from today (May 7).
With the CSA having been implemented, the State Bank of Pakistan (SBP) Tuesday asked for bids from the authorized dealers to auction Chinese Yuan (CNY) on June 4. The SBP and the People’s Bank of China (PBoC) had inked the landmark agreement worth CNY 10 billion and Rs 140 billion in December 2011 in Islamabad.
The landmark bilateral arrangement, which was signed by SBP Governor Yaseen Anwar and PBoC Deputy Governor DU Jinfu, is being implemented after the issuance of necessary instructions to the banks and completion of operational formalities with the PBoC.
According to SBP’s implementation guidelines, the agreement would give a positive signal to the market on the availability of liquidity of other country’s currency in the onshore market.
The arrangement would augment the pool of liquidity available to finance bilateral trade between the two countries, supplementing the already available sources of liquidity.
In order to ensure transparency in determination of market interest rates, the State Bank has decided to conduct competitive auctions of Chinese Yuan Loan Facility (CNYLF).
According to an SBP circular, the first auction would be held on June 4 for 3- and 6-month period facility at an auction reference rate of 5.75 and 6.00 percent, respectively.
“To provide sufficient lead time for banks to arrange on-lending of CNY to importers and exporters, the first auction would be conducted on June 4 with settlement on June 13,” said the SBP circular. Based on the participation of banks in this auction, the central bank would draw on the swap line and provide Chinese currency to the local banks. The banks would on-lend this liquidity to the importers and exporters involved in trade denominated in CNY.
At maturity, the importers and/or exporters would repay the foreign currency to the lending bank, which in turn would repay to the respective central bank.
The State Bank has asked the banks to educate their customers on the additional option of denominating their trade documents in CNY.
“The SBP would encourage banks to hold sessions with local trade bodies,” it said. The regulator also has requested the local importers and exporters to contact their respective banks for more details on how they could borrow Chinese Yuan liquidity to finance bilateral trade.
The objective of the CSA is to promote bilateral trade and investment between the two countries in the respective local currencies.
Since the CSA is a bilateral financial transaction, all terms and conditions apply equally to both countries and the pricing is based on standard market benchmarks which are widely acceptable in the respective domestic markets.
The execution of bilateral CSA was achieved through series of technical-level team discussions between both the central banks led by Asad Qureshi from State Bank and YAO Yudong from PBoC.
