The quarterly report by the Bank for International Settlements does not say it in so many words, but its warning of possible currency and funding mismatches illustrates why the much ballyhooed Chinese swap lines are misunderstood.
Recall that during worst of the Great Financial Crisis in 2008-2009, there was not G7 currency intervention. Instead, officials recognized the main problem was not foreign exchange prices per se, but the access to dollar funding. The Federal Reserve responded accordingly and established currency swap lines with several countries, to make dollar funding available, through national central banks. These swap lines were used to varying degrees. The swap lines for the ECB, BOJ, BOE, BOC, and SNB were converted into permanent structures of the global architecture in the form of standby agreements at the end of 2013. Although the swap lines, and now standby agreements, were bilateral, the US never used the facility.
Chinese officials saw the US swap lines and erroneously thought this was part of the US efforts to reimpose a dollar-centric order. They responded by extending their own network of currency swap agreements. Barring a single exception, they have not been drawn upon. Yet, it has not prevented observers from claiming they represent the internationalization of the yuan.
In the BIS quarterly report released over the weekend, officials warn that a continued appreciation of the dollar will squeeze many corporations from emerging market economies. There are two channels by which this will happen. First, many of these businesses issued bonds denominated in foreign currencies, especially US dollars. The BIS estimates such entities had issued $2.6 trillion of such obligations, of which three-quarters was denominated in US dollars. Second, international banks have lent about $3.1 trillion as of mid-2014, mainly in dollars, to such companies.
