The (Ineffective) Financial Statecraft of China’s Bilateral Swap Agreements

Since 2008, the People’s Bank of China has signed bilateral swap agreements (BSAs) with 35 foreign central banks. Collectively, these deals amount to nearly $500 billion in Chinese renminbi (RMB) available to Beijing’s foreign partners. The pace with which China has pursued new BSAs since 2008 is unprecedented and raises questions about the motivation behind the deals and their potential consequences. 

A journal article by Daniel McDowell explains that China’s BSAs can be understood as a form of financial statecraft: the use of national financial and monetary capabilities to achieve foreign policy ends. The author explains how swap agreements work, what motivates China to use BSAs and what the potential outcomes are.

According to the article, China has deployed BSAs for different reasons with varying success. While BSAs have been ineffective at promoting trade settlement in RMB and reducing China’s vulnerability to the dollar’s dominance in trade, China’s use of BSAs for a short-term liquidity backstop outside of the Bretton Woods institutions has helped partner countries in need and expanded Chinese economic influence. However, the author explains that their potential is dependent on China’s willingness to act as a unilateral crisis lender and its ability to further institutionalize the RMB. Until then, the conversation surrounding BSAs will remain focused on their latent capacity to enhance Chinese influence in the world rather than their actual impact.

This study was published as part of a special issue of the journal of Development and Change edited by William N. Kring and Kevin P. Gallagher.