Hong Kong and China Upgrade Currency Swap Line, Allowing Beijing Access to More Foreign Currency Reserves

By Kathleen Li
Kathleen Li
Kathleen Li
Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is an engineer, chartered in civil and structural engineering in Australia.
July 13, 2022 Updated: July 13, 2022

Nearly 30 percent of Hong Kong’s foreign currency reserves are now accessible to Beijing after the People’s Bank of China (PBC) and Hong Kong Monetary Authority (HKMA) upgraded their currency swap line on July 4.

Upgrading the currency swap line to a standing arrangement was one of two new policies announced by the PBC and the HKMA last week. With no need for renewal, the size of the standing currency swap line has also been expanded by 60 percent, increasing from 500 billion yuan ($74 billion) to 800 billion yuan ($119 billion).

A currency swap line is an agreement between two central banks to exchange currencies, as defined by the European Central Bank. It allows a central bank to obtain foreign currency liquidity from its issuing bank. Currency swap lines are usually renewed every several years if it is not a “standing” relationship.

Data released by HKMA on July 7 showed that Hong Kong’s official foreign currency reserves in June were $447.3 billion, down $17.7 billion from May. And with a standing currency swap line limit of $120 billion, the PBC can access approximately 27 percent of Hong Kong’s foreign currency reserves.

According to Pan Gongsheng, deputy governor of the PBC and the director of the State Administration of Foreign Exchange, this is the first time the PBC has signed a standing currency swap agreement.

Pan said the new policies will “consolidate Hong Kong’s status as an international financial center and an offshore RMB business hub.”

However, experts suggest that the standing currency swap line does not benefit the Hong Kong dollar.

Frank Tian Xie, a business professor at the University of South Carolina Aiken, told The Epoch Times that the standing currency swap line would favor Beijing by offering a path to obtain more foreign currencies, but it has no benefits for the HKD.

Since Oct. 17, 1983, Hong Kong has adopted the Linked Exchange Rate System, allowing HKMA to stabilize exchange rates from the U.S. dollar to the HKD between 7.75 and 7.85.

As a currency pegged to the U.S. dollar, the predominant international currency, the HKD has long maintained market confidence. However, a new swap line with the Chinese yuan will likely harm the value of HKD.

The yuan is not fully convertible, which could cause issues for cross-border fund transfers. The PBC also applies administrative measures to influence the exchange rates between the yuan and foreign currencies.

“The standing currency swap line would erode HKD’s credibility as a hard currency and, one day, the HKD will find itself in a position similar to the yuan,” Xie said.

Investopedia defines hard currency as money issued by a nation that is seen as politically and economically stable and is widely accepted around the globe as payment for goods and services.

Miyasita Kiyokawa, a current affairs commentator familiar with the Chinese financial system, told The Epoch Times on July 9 that Chinese companies are facing massive offshore debts in 2022. For example, the foreign debts of real estate developers in China have reached as high as $100 billion.

The other new policy announced on July 4 was an initiative called “Swap Connect,” a mutual access scheme to connect the interest rate swap markets between Hong Kong and Mainland China.

“The freedom in Hong Kong is quickly being eroded under the [Beijing-imposed] national security law. The city is not the vibrant international financial hub it once was. It is becoming like the Shenzhen Special Economic Zone, [a financial center fully under Beijing’s control],” Kiyokawa added, suggesting that Beijing may impose more financial schemes on Hong Kong until it achieves complete control.

Ellen Wan contributed to the report.

Kathleen Li
Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is an engineer, chartered in civil and structural engineering in Australia.