Trade Ties and Trade Pacts Drive China's Bilateral Renminbi Swap Network

What the Study Asks

Steven Liao and Daniel McDowell investigate why China and its partners sign bilateral currency swap agreements (BSAs) that facilitate the international use of the renminbi (RMB). The paper asks which economic and institutional links between China and foreign central banks predict the presence of a BSA, and how these agreements fit into broader efforts to internationalize the RMB.

Why This Matters

BSAs let firms settle cross-border trade and direct investment in RMB, lowering transaction costs and providing local currency liquidity during international shocks. Understanding the drivers of these agreements sheds light on the institutional strategies behind currency internationalization and on how states build layers of cooperation to support cross-border economic ties.

How the Authors Approach the Question

• The authors treat BSAs as dyadic cooperative outcomes between China and partner countries (China–partner pairs).
• They develop two mechanisms linking economic interdependence to BSAs: (1) financing insulation—access to RMB liquidity during international liquidity shocks—and (2) transaction-cost reduction—easier RMB settlement for trade and FDI.
• They also hypothesize that de jure economic integration—presence of preferential trade agreements (PTAs) and bilateral investment treaties (BITs)—raises the probability of a BSA because BSAs extend existing formal trade and investment cooperation.
• Using empirical dyadic analysis of China’s 25 BSAs and its foreign partners, the authors test whether de facto trade and investment ties and de jure agreements predict BSA cooperation.

Key Findings

• Stronger de facto trade interdependence between China and a partner increases the likelihood that the pair will sign a BSA.
• The presence of PTAs and BITs between China and a partner also raises the probability of BSA cooperation, consistent with BSAs acting as an additional layer of formal economic integration.
• These results support both proposed mechanisms: BSAs are motivated by economic exposure to China and by institutional complements that lower costs of cross-border exchange.

What This Means for RMB Internationalization

The evidence suggests that China’s swap network grows outward from deep trade and investment relationships and from existing legal economic ties. BSAs appear to be pragmatic tools that reinforce bilateral economic integration and reduce frictions for RMB use, helping explain the conditions under which the renminbi gains footholds in foreign markets.