Currency swap agreement, financial market, and China’s outward foreign direct investment

YU Guocai1 WANG Chenyu1

(1.School of Economics, Shandong University of Technology)

【Abstract】By 2019, China has signed bilateral currency swap agreements with 36 countries with a total scale of over CNY 11 trillion, which should have played a significant role in maintaining the stability of the international financial market and promoting bilateral trade and investment. This article focuses on the impact of currency swap agreements on the scale and intensity of Chinese outward foreign direct investment (OFDI); the multi-period difference-in-differences model is used to explore such effect; and the PSM-DID method, as well as the falsification test, is applied to verify the model’s robustness. Moreover, both the financial market’s intermediary mechanisms and adjustment mechanisms are inspected to study the currency swap policy’s effect on Chinese OFDI. Using the panel data of 169 countries from 2003 to 2018, this paper found that currency swap agreements have significantly improved the level of Chinese OFDI with an increase in the OFDI scale by about 39.3% and an increase in the OFDI intensity by about 24.5%. Furthermore, exchange rate markets are the determinant mechanism for currency swap agreements to promote Chinese OFDI, and the intermediary transmissions of forecasted exchange rate risk, rather than adjustment transmissions, are the main influence channel. For forecasted exchange rate risk will restrain Chinese OFDI, bilateral currency swap agreements can effectively reduce the forecasted exchange rate deviation risk and forecasted exchange rate volatility risk, thus promoting Chinese OFDI development. Specifically, the currency swap agreements stipulate that the exchange rate should be fixed when necessary, which could change the exchange rate forecasts of investors and reduce the forecasted deviation risk and excessive fluctuation risk, similar to the exchange rate target area’s function. Meanwhile, with the channel of local currencies’ use for cross-border settlement, the currency swap agreements could avoid the exchange rate risk caused by the fluctuation of the third country currency, such as the US dollar. Such exchange rate market mechanisms provide a stable investment environment for Chinese enterprises and effectively boost the scale of Chinese OFDI, although the mechanisms have no obvious effect on the promotion of OFDI intensity. As for the interest rate markets mechanism inspection, the currency swap agreements have not yet worked due to the underdevelopment of the CNY offshore market and the financing difficulty for enterprises’ foreign investment. In addition, various robust tests like the PSM-DID method with kernel matching and nearest-neighbor matching as well as the falsification test of the policy time change show that the model specification is suitable and the conclusions are robust. Our findings are meaningful for Chinese OFDI and for international financial policy cooperation. Under the trend of anti-globalization as well as the complex international economic relationship and situation, this research provides a reference for China to further deepen the international financial field cooperation. Signing currency swap agreement with more countries to promote the internationalization of CNY may not only promote the development of China’s OFDI and smooth the domestic and foreign double circulation pattern but also play an important role in stabilizing the international financial markets and safeguarding the international economic order in line with the interests of all parties.

【Keywords】 currency swap agreement; Chinese outward foreign direct investment; forecasted exchange rate risk;


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Vol , No. 03, Pages 19-35

March 2021


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