The Banco Central de Chile (Chile's central bank) said on Friday that it had renewed for five years its bilateral renminbi/peso (RMB/CLP) currency swap agreement with the People's Bank of China (PBoC). The line is worth approximately US$ 7,500 million.
Diario Financiero reported the news and noted that the agreement between the two institutions has been in place since 2015. CNN Chile also reported the renewal, citing the same figures and terms.
What is a currency swap? Think of two neighbors who agree to lend each other sugar if either one runs out. Here, the two central banks agree to exchange Chilean pesos for renminbi, China's currency, if either side asks.
According to the central bank, those funds could be used to provide liquidity, meaning money available right away, and so help keep financial markets stable if needed.
The Banco Central said the line is precautionary. As long as it is not activated, it does not change the level of international reserves, the foreign currency cushion the country keeps for emergencies. It works like insurance: it is there, but it only counts when it is used.
The agreement has also had a trade goal since it was first signed. It aims to make renminbi payments easier in Chile and to lower transaction costs for financing and foreign trade deals in that currency.
In practice, this helps a Chilean company that buys from or sells to China. If it can deal directly in renminbi, it avoids going through the dollar first and saves on exchange fees.
The line is also meant to let investors buy renminbi instruments directly in the Chinese market. CNN Chile pointed out that the agreement matters more because of one simple fact: China is the Chilean economy's main trading partner.
With this renewal, the line remains in force for the next five years. The sources do not give details on the activation conditions or say whether anything changed from the previous agreement.
