Jumpstarting an International Currency

This paper asks how a currency achieves international status — moving from zero to positive cross-border use — and whether deliberate central bank policy can accelerate that transition. The authors focus on the People’s Bank of China (PBoC) swap lines signed between 2009 and 2018, which extended RMB-denominated lender-of-last-resort credit to foreign central banks for the stated purpose of supporting RMB-denominated trade finance and settlement.

The empirical analysis combines two datasets. The first covers every RMB swap line agreement the PBoC signed with a foreign central bank (38 countries by 2018), compiled from PBoC news releases and validated against counterparty communications, treated as a staggered binary absorbing treatment. The second is monthly SWIFT data on cross-border payment message values (October 2010 – October 2018), disaggregated by currency and message type (payment orders MT103/MT202 and trade-finance messages MT400/MT700). The working sample, after excluding financial centre hubs, sanctioned countries, pre-sample treated countries, and small economies, covers 114 countries with 11,058 observations, of which 21 are treated during the sample period.

The main identification strategy is a staggered difference-in-differences design using the imputation estimator of Borusyak et al. (2024), with controls for bilateral trade with China, Chinese economic policy variables (RMB clearing bank presence, AIIB membership, infrastructure investment flows, UN voting alignment), and regional RMB adoption trends. The authors are explicit that conditional independence is not guaranteed and characterize results as documenting an association.

At the extensive margin, signing a swap line is associated with an approximately 14 percentage point increase in the probability that a country uses the RMB for international payments in a given month (baseline column: 11%, rising to approximately 14% with controls and approximately 20% when anticipation effects are accounted for by shifting treatment timing six months earlier). At the intensive margin — using ln(1 + RMB payments) and Poisson specifications — RMB usage is between 250% and 440% higher in treated countries following the policy. The effect concentrates within the first 12 months of signing and persists without reversion. The effect is present in payments not involving China as a counterparty, is not explained by Belt and Road Initiative membership, and does not extend to bilateral trade volumes with China.

Four mechanisms from the paper’s theoretical model are tested and supported. First, swap lines reduce offshore RMB borrowing costs by an estimated 115 basis points on average (rising to 205 basis points for emerging market currencies). Second, the 2015–16 RMB crisis — in which the PBoC drained offshore liquidity to defend the exchange rate peg, sharply raising private RMB borrowing costs — caused a significant decline in RMB use among countries without a swap line but not among those with one, consistent with the model’s prediction that swap lines cap the right tail of borrowing cost distributions. Third, effects are concentrated in trade-finance SWIFT messages, stronger in countries with above-median trade shares with China, and increasing in intermediate import intensity and working capital reliance. Fourth, the RMB gains displace existing international currencies — the USD share falls by approximately 8 percentage points and the EUR share by approximately 2.5 percentage points — rather than displacing local currencies, as the model predicts. There are also geographic spillovers: a neighboring country signing a swap line is associated with a 10% increase in RMB use even for countries that did not sign.

The theoretical framework models import-export firms that choose simultaneously the currency of trade finance and the currency of sales invoicing. Sticky prices create a complementarity between these two choices. A swap line truncates the right tail of the borrowing cost distribution (first-order stochastic dominance), which can push firms above a threshold into using the rising currency for both liabilities and invoicing. The model predicts threshold behavior — a currency either jumpstarts or does not — and explains why only a small number of currencies ever achieve international status.

Q: What are the PBoC swap lines and how do they mechanically affect firms? A: A PBoC swap line is a renewable 3-year agreement between the PBoC and a foreign central bank that allows the foreign central bank to borrow RMB and on-lend it domestically to support RMB-denominated trade finance. Like other central bank lending facilities, they place a ceiling on interest rates, thereby truncating the right tail of the distribution of RMB borrowing costs faced by commercial banks and their firm customers. The key insurance property holds even when lines are not actively drawn upon, because their existence caps tail risk.

Q: What is the extensive margin finding for swap lines and RMB payments? A: Signing a swap line is associated with an approximately 11% increase in the probability that a country uses the RMB for cross-border payments in a given month without controls, rising to approximately 14% with the full set of controls, and to approximately 20% when treatment timing is shifted six months earlier to account for anticipation effects. The event study shows the effect concentrates within 12 months of signing and does not revert.

Q: What is the intensive margin finding? A: Using ln(1 + RMB payments) and Poisson specifications — preferred because Mongolia is an outlier and payment value volatility is increasing in payment level — treated countries have RMB payment values between 250% and 440% higher than control countries after signing. The RMB share of payments rises by 0.13 percentage points on average, compounding to approximately 0.3 percentage points in years 3–4, or roughly one-fifth of the overall rise in RMB payments over the full sample period.

Q: How do the authors address the concern that swap lines are signed precisely when economic integration with China is deepening? A: They include a comprehensive set of controls: bilateral export and import values to/from China, the ratio of Chinese trade to GDP, China trade agreement status, RMB clearing bank presence, AIIB membership, infrastructure investment flows, and UN voting alignment. They also show separately that (i) the effect is present in RMB payments not involving China as a counterparty, (ii) Belt and Road Initiative membership does not account for the effect, and (iii) there is no increase in bilateral trade with China following swap line signing. The authors nonetheless characterize results as documenting an association, not establishing causation.

Q: Do swap lines actually reduce RMB borrowing costs as the model requires? A: Yes. Using the same staggered difference-in-differences methodology, signing a swap agreement is associated with a 115 basis point fall in offshore RMB borrowing rates on average. For emerging market currency comparators the effect rises to 205 basis points. The event study shows an immediate and sustained reduction with no detectable pre-trend.

Q: What does the 2015–16 RMB crisis reveal about the mechanism? A: In August 2015 the PBoC adjusted its RMB-USD central parity rate, triggering a 3% depreciation over two days and subsequent offshore liquidity drainage that raised both the level and volatility of offshore RMB borrowing costs until approximately April 2017. This shock was primarily financial rather than reflecting a Chinese economic slowdown. Countries without a swap line experienced a sharp decline in RMB payment usage in 2015Q4, while countries with a swap line — whose right-tail borrowing costs were capped — did not, consistent with the model’s prediction that the lines insulate against tail risk shocks.

Q: Are the effects concentrated in trade finance as the model predicts? A: Yes. Restricting the analysis to SWIFT trade-finance message types (MT400 and MT700), the coefficient estimates are similar in magnitude to those for all payments. Effects on the trade finance extensive margin are concentrated among countries with above-median trade shares with China. The effects are also increasing in countries’ intermediate import intensity and in the degree to which export industries rely on working capital.

Q: Which currencies does the RMB displace and which does it not displace? A: The swap line is associated with a 14 percentage point rise in the RMB share of payments to and from China. Decomposing this: the USD share falls by approximately 8 percentage points, the EUR share by approximately 2.5 percentage points, the combined GBP/JPY/CHF share by approximately 0.5 percentage points, and other currencies by approximately 3 percentage points. The local currency of the country receiving the swap line does not show a statistically significant decline, consistent with the model’s prediction that the RMB competes primarily with existing international vehicle currencies rather than with domestic currencies.

Q: Are there geographic spillovers from swap lines? A: Yes. A neighboring country (defined as countries within 1,000 km, or the nearest five if fewer than five are within that distance) signing a swap line is associated with a 10% increase in RMB payments for the non-signatory neighbor. The authors attribute this to supply chain linkages: firms importing RMB-invoiced inputs from a swap-line country face an incentive to adopt RMB for their own downstream transactions.

Q: What does the model predict about which currencies can ever become international? A: The model identifies three thresholds a currency must pass. First, exchange rate variance must be sufficiently low; most currencies fail this condition. Second, the right tail of borrowing costs in that currency must not be too high; skewed distributions fail the threshold condition in Proposition 2. Third, the currency-issuing country must be large enough as an export market or intermediate input source to generate the complementarity factor Psi that makes adopting the currency worthwhile. Most currencies fail on multiple dimensions, explaining why so few achieve international status.

Q: How do sticky prices create the complementarity between trade finance currency and invoicing currency in the model? A: Firms set prices in advance before exchange rates and borrowing costs are realized. If a firm borrows in currency r to finance imported inputs but prices its exports in currency d, cost and revenue shocks are mismatched, creating profit volatility. Nominal price stickiness means firms cannot adjust prices ex post to maintain constant markups. This makes it optimal to align the currency of liabilities (trade finance) with the currency of export invoicing, creating a complementarity that amplifies the effect of a reduction in r-currency borrowing costs on invoicing currency choice.

Q: How do the authors handle the potential bias from heterogeneous treatment effects in the staggered difference-in-differences design? A: They use the imputation estimator of Borusyak et al. (2024), which is robust to heterogeneous treatment effects across cohorts, clustering standard errors at the country level and averaging treatment effects by cohort. They also verify results using the synthetic difference-in-differences estimator of Arkhangelsky et al. (2021), which reweights observations to equalize pre-treatment trends, and show results are robust across both two-way fixed effects and these more modern estimators.

Q: What historical parallel do the authors draw and what does it imply for the RMB’s future? A: The paper draws a parallel with the USD’s displacement of pound sterling in trade finance in the decade following the Federal Reserve’s creation in 1913 and the establishment of bankers’ acceptances. That transition was supported by World War I’s damage to the UK economy and rapid US economic growth. The authors conclude that RMB internationalization will require not only continued policy support but also favorable economic fundamentals including sound monetary policy and deeper capital markets.

Q: How does the PBoC’s swap line program differ from Federal Reserve and ECB swap lines? A: PBoC lines differ in four key respects: they have longer maturities (3-year renewable agreements vs. shorter-term Fed/ECB lines); they involve a large and diverse set of mostly developing countries rather than a handful of advanced economies; they target trade finance in a context of limited RMB cross-border banking rather than addressing foreign-bank dollar funding shortfalls caused by dollar dominance; and they were designed to initiate internationalization rather than to respond to an existing dominant currency’s liquidity stresses. The aggregate notional limit of approximately RMB 3 trillion is nonetheless comparable in scale to the USD 600 billion of peak drawings from Fed swap lines.

International currency jumpstart: The process by which a currency moves from zero to positive international use, as opposed to the better-studied phenomenon of a currency achieving dominance. The paper distinguishes jumpstart (initial adoption) from dominance (widespread adoption), arguing that different mechanisms govern each stage.

PBoC swap lines: Renewable 3-year agreements between the People’s Bank of China and foreign central banks enabling the latter to borrow RMB and on-lend it domestically for RMB-denominated trade finance. In the paper’s framework, they function as an extension of the lender of last resort function abroad, placing a ceiling on offshore RMB borrowing costs and truncating the right tail of the borrowing cost distribution.

Trade finance currency complementarity: The paper’s central mechanism — the alignment incentive between the currency of a firm’s liabilities (working capital / trade finance for imported inputs) and the currency of its export invoicing. Sticky prices create this complementarity because misaligned currency choices expose firms to uninsurable profit volatility.

Borrowing cost distribution truncation: The mechanism by which a swap line affects firm behavior — not by lowering average costs but by capping the right tail of the distribution of possible RMB borrowing rates. The model requires first-order stochastic dominance of the post-swap-line distribution over the pre-swap-line distribution.

Threshold condition for currency adoption: Derived from the model’s Proposition 2, the condition on the expected concave function of borrowing costs relative to an adjusted interest rate differential that must be satisfied for a firm to choose r-currency credit over d-currency credit. The complementarity factor Psi, which increases with the size of the rising-currency market, enters this threshold.

Extensive vs. intensive margin of currency use: The extensive margin refers to whether a country uses the RMB at all in a given month (1(Rpayment > 0)); the intensive margin refers to the share of payments denominated in RMB or the log value of RMB payments. The paper finds the swap lines affect both margins, with the extensive margin effect appearing immediately and stabilizing after 12 months.

Vehicle currency displacement: The paper’s empirical finding that RMB adoption displaces existing international vehicle currencies (USD, EUR) rather than local currencies. This is a prediction of the model: firms adopting RMB for trade finance were previously using an existing international currency, not their domestic currency, for that purpose.