Ukraine signs $2.4bn currency swap deal with China

By bne IntelliNews June 27, 2012

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The National Bank of Ukraine (NBU) and People's Bank of China have signed a currency swap deal worth 15bn yuan ($2.36bn), aimed at boosting mutual trade, investment and financial stability, according to a statement on the Chinese bank's website. Ukraine will welcome other potential benefits as well.

Worth the equivalent of up to UAH19bn, the currency swap aims to boost exports and imports between the pair, develop investment and generally support financial stability in the two countries, the Chinese bank said. The deal lapses in three years and can be terminated at any time before that by mutual consent.

The arrangement will enable companies to use national currencies for export-import operations without the need to use a third-party reserve currency. Kyiv, struggling to keep its fiscal head above water, will welcome the benefits the deal offers its central bank reserves and exchange rate management. It is also likely to hope that it will lead to an increase in Chinese investment in the country, which remains limited.

"We consider the deal to be positive for Ukraine, especially in the current market environment, even though CNY is not a fully convertible currency and may not be counted towards international reserves under IMF methodology," Dragon Capital's analysts write in a note. "The NBU's reserves declined by $0.9bn to $31bn in May (-3.3% year to date) due to repayments to the IMF and probably remained on a downward trend in June due to F/X market interventions and external public debt redemptions," they add.

"The swap deal will strengthen the NBU's ability to support the UAH:USD exchange rate as some Ukrainian-Chinese trade contracts (in 2011, net imports of Chinese goods to Ukraine totaled $4bn) may now be quoted in CNY rather than USD, thus reducing local importers' dollar demand and easing pressure on the F/X rate being targeted by the central bank."

For Beijing, the deal is just the latest in a long-running campaign to quash the role of the US dollar as a reserve currency. As the largest trader in the world - as well as the biggest holder of US Treasuries - China is highly exposed to fluctuations in the value of the dollar, and has expressed outrage over recent actions such as the Fed's quantitive easing programmes, which have destabilized the currency. It has signed currency swap agreements with a series of countries over the past few years, mostly in Asia and Eastern Europe.

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