1 October, 2020

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Sri Lanka And China Entered Into A Currency Swap Agreement

By Hema Senanayake – 

Hema Senanayake

Hema Senanayake

In early 1950s Sri Lanka was administered under a UNP government. In December of 1952, Sri Lanka and China signed the “Rubber-Rice Pact.” Anybody can easily understand the mechanics of the Pact; Sri Lanka exports Rubber to China and Imports Rice, it is simple and clear.

Sri Lanka is now ruled by the UPFA government. On 16th of September, 2014, i.e. a few days ago, Sri Lanka signed another landmark agreement with China; it is a Currency Swap Agreement. What is this? Unlike the Rubber-Rice Pact, most of us do not understand what this agreement is about. I wanted to write and explain the mechanics of the currency swap and its effects on Sri Lanka, so I tried to find out the specific terms of the agreement. I failed, because in the official website of the Central Bank of Sri Lanka, I did not find any information about it. Then I searched the website of the Chinese Central Bank which is known as People’s Bank of China (PBC). In PBC website, I found only the following:

“PBC Signed Local Currency Swap Agreement with Central Bank of Sri Lanka. With the approval of the State Council, the People’s Bank of China signed, on September 16, 2014, an agreement on bilateral local currency swap with the Central Bank of Sri Lanka. The size of the swap facility is 10 billion yuan/LKR 225 billion. The term of the agreement is three years and can be extended with mutual consent. The signing of the local currency swap agreement will help promote bilateral trade and investment and strengthen financial cooperation between the two central banks.” (LKR means Sri Lanka Rupee, yuan is Chinese National Currency i.e. CNY)

Since the terms of the agreement are not known to me, I will be able to explain the most general effects of the agreement. Firstly, I like this agreement, it is a historical need of China and the world trade and Sri Lanka cannot avoid it but must be careful.

We need money or currency in order to effect the settlement of payments. When we do trade with India we need usually U.S. dollars. For example, when a Sri Lankan entrepreneur wants to import something from India he or she has to open a L.C. (Letter of Credit). Basically L.C. is a letter issued by a bank to another bank in a different country to serve as a guarantee for payments after the shipment is done by the exporter. In this document, it is mentioned the name of the currency that the payment is settled by and between the two banks in the importing and exporting country; usually that currency is U.S. dollar.

There is no way that Sri Lankan importer can pay for the Indian exporter in Sri Lankan rupees. This was the case with China too; but it has now changed with the currency swap agreement. Sri Lankan importer can now pay to Chinese exporter with Sri Lankan rupees or in yuan; there is no need of U.S. dollars or euros. This is a significant change.

Let me give you another example. Previously a Chinese tourist who wanted to visit Sri Lanka needed to go to his or her bank and get U.S. dollars before come to Sri Lanka. Now a Chinese man can just come to Sri Lanka with yuan in his wallet and exchange them to rupees at the airport or in the city; no U.S. dollars involved in his visit.

From the above two examples you may see that there are chances to accumulate rupees in the Chinese banking system and yuans to accumulate in the Sri Lankan financial system. But the agreement has set a limit for such accumulations. This limit is described by the size of the swap facility. The size of the swap facility is 10 billion yuan/LKR 225 billion. What does this mean? This means at the end of the three years of the agreement, if PBC has accumulated LKR 225 billion the PBC can ask 10 billion yuan in exchange of LKR 225. Sri Lankan Central Bank is obligated to pay it under the agreement. If Sri Lankan Central Bank has only 2 billion yuan, Sri Lanka can’t pay the amount in yuan. Instead Sri Lanka has to pay the balance amount in a currency acceptable to PBC; that currency could possibly be U.S. dollars. This could possibly an important condition in the agreement.

However, this kind of situation will not arise if Sri Lanka could strike a reasonable trade balance with China. Also chances are there for a few renewals. When the yuan is firmly established in Sri Lankan financial system as a “reserve currency” similar to U.S. dollar, the China will stop renewing the agreement; this is unavoidable and is a natural evolution in the global financial system. Chinese yuan should evolve to be a reserve currency. In this regard I wrote an article to Asian Tribune in 2011 under the heading, “The US to confront China for undervaluing its currency.”

In the article I wrote:

“If Chinese political leadership is ready, the most important conditions are now ready to lay the foundation for Yuan to be an effective reserve currency before the end of the current global economic and financial crisis. Let us take a quick assessment about the most important conditions that are required to launch a reserve currency. Those conditions are:

1) the size of the physical productive power

2) monetary mass

3) delivery mechanism of the currency

4) community of nations that are willing to use (or borrow on) the new currency.

Except for the above condition (3) which is mostly technical, Chinese yuan has all the conditions in its favor.” (Asian Tribune, 2011- 10-12)

This is exactly what China is doing with currency swap agreements. They have signed currency swap agreements with many countries including some countries in Europe. This is also a justifiable strategy to avoid U.S. pressure to appreciate yuan against dollar.

However, currency swap agreement demands one important thing on our part that is to stabilize the rupee in its present value. If rupee is depreciated suddenly as was happened in 2011 this kind of agreement is not possible. Therefore, in the coming few years we will see a more stabilized rupee. The Central Bank of Sri Lanka might be extra cautious to maintain the value of rupee. Perhaps this becomes a little bit easy with the reduced importer demand on dollar with the implementation of this agreement. In addition there are chances to mount pressure to appreciate the rupee. Also appreciation of rupee is not beneficial with regard to this agreement. Perhaps there can be terms and conditions in this swap agreement about the remedial measures when a respective currency appreciate or depreciate significantly.

In brief, in the coming few years we will see a more stabilized rupee, more private trade with China, more Chinese investments in Sri Lanka, increase of Chinese tourists etc. This currency swap agreement is progressive if China limits it to the said objectives which are to promote bilateral trade and investment and strengthen financial cooperation between the two central banks. The same agreement can be used to enslave a developing nation like us in order to achieve geo-political objectives if China wants to. I hope China does not want it.

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Latest comments

  • 9
    4

    .
    Srilanka should follow Chinese political policy and become a one party rule system. This will save us millions of dollars (read yuans) in election costs, and Rajapakse’s can rule for ever.

    :-)

  • 5
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    I think, Sri lanka should have this kind of agreements with other countries too.

    • 2
      4

      Jim Softy you lack education.Period.Go back to school.

      • 1
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        This is known for years. US was preparing for this outcome. That’s why the Zionist media (BBC..CNN..fox..Reuters…ABC..etc) are diverting the attention of the world public with their gimmicks in Islamic terrorism…Arab Spring etc.

        The real issue is Israel is getting ready to kill the dollar to replace it with another currency. They want to rule the world by first acquisition if the oil fields in the Arab regions.

        So,the innocent Palestinians are paying a heavy price as Zionists wants to warn the world of its fire power. And they want to get ready for the arrival of the anti Christ (Dajjal).

        The enemies of Dajjal will be born from the Palestinians. So, they want to kill almost all the babies and kids born to Palestinians. So, the war on children.

        Its an epic level like we read in the story of Moses. Pharaoh ordering to kill all the babies and kids after having known through his advisors on prophesies foretold about a possible enemy being born into the persecuted Jewish community.

        Zionists fear prophesied. That’s why they target Islam and Russia. Because, these two forces will forge an alliance in the end times to counter the evils of Zionism.

        BBS is the local agents of the Zionism to advance the cause. They fear the power of Islamic prophesies foretold in the events of the end times.

        Its a vast subject that cannot be squeezed in here. So, you may watch the following videos if you want to know more about it:

        Dollar Collapse and WW3 HAS BEGUN !!! WATCH THIS !: http://youtu.be/byHOT7v-CXo

        The Jewish War On Vladimir Putin
        http://www.youtube.com/watch?v=yTT9TOZ3ihY

        The Difference Between Putin & Obama
        http://www.youtube.com/watch?v=rybEA3axS5Y

        BRICS…Breaking The Jewish Money Power
        http://www.youtube.com/watch?v=WPKymVF57Mg

        Sheikh Imran Hosein 2014 Islam, Russia, Ukraine and Alliance with Rum Rome
        http://www.youtube.com/watch?v=nUzHQy54DdM

        The Zionist War on Islam & The Next False Flag In…: http://youtu.be/CYBN15ePLkQ

        Israeli Media Reveals The Secret Behind Communism: http://youtu.be/BFpFCy_b2SM

        Ex-CIA Agent: America creates its own enemies: http://youtu.be/cLjZoA3GaVE The

        Coverup of Zionist Organized Crime!: http://youtu.be/y3GMDcFOq0g

        • 0
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          Nothing wrong with Jews controlling the US-global monetary system. Only bad thing about Jews is the Israeli situation. Once we can convince them to leave aside Jewish homeland (and give the land back to the Arabs) we can then convince them that their importance is for helping the world in balancing out the money system.

          Americans created the monetary system (especially when they invented the use for oil), and the Jews are sustaining it. China/Russia are trying to take over $$ made from US ingenuity. The will go only so far with the infrastructure building and encouraging other infrastructure building in lesser infrastructured lands. And also with trade. Once all that is established, things will balance out. Then where will the value for money then go? Hence the reason for greater global-socialist aspirations via Obama/Clinton/Bush and the thinking presidents, because they have been through it and know that there is so much that can be done with commerce and trade and science and inventions (at least when they involve establishing monetary systems).

          • 0
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            But guess the Jews function essentially for their homeland…….in the absence of this, and with the strong cohesion of the family, race, religious, heritage, and historical contextual, then they become rather an erratic group outside of more established and ancient homelands.

  • 2
    0

    The agreement from what I have read from the article is not much different to the Rubber Rice Pact we had. Later years we had even Red Chillies coming in from China under the same agreement Rice they could ship did not cover all the Rubber we shipped. The Important thing is to maintain Balance of Trade in other words we should be able to export enough to offset Imports. Perhaps we may Import and Ship that product for US Dollars.We could even bring in Crude Oil refine it and supply it to Chinese ships passing through the Colombo port for Chinese Yuan If we are unable to do such creative stuff what will happen is the Yuan will buy Buildings in selected places, Shares in the Colombo Stock Exchange etc etc which one may call it an act of Enslavement as it will be an encroachment of what Sri Lankans may normally Own. But don’t worry The Chinese have so much Dollars they are buying property all over the world they don’t call it enslavement they call it Business. We need to learn to develop more fancy apartment buildings for sale in Yuan that will keep the issue under control.

  • 3
    2

    Sri Lanka is a natural destination for Chinese tourists. Not having to change Yuan into US dollars to visit Sri Lanka should make a big difference to the tourist trade.

  • 3
    0

    I wonder whether the ordinary poor folk of this country will ever receive any benefit from all these high sounding Agreements. They will sign any agreement even with the Mahasohona if they can `hit a a good komis`. It is high time that we changed the designations of these politicos as KOMASAARIS, KOMASAARIS GENERAL etc!

  • 2
    2

    We also entered into various agreements for currency with Norway, India, etc. After that we went for gold.

    But the Chingalam army robbed all our gold.

  • 0
    0

    Seems a legitimate enough swap, as long as the US$$ stays up there (LKR Pegged to the China Yuan pegged to the US$$)……. wonder how the Chinese currency will manage to sustain after the US $$ is ignored (US $$ won’t go away too easily).

  • 0
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    The SWAP will lock-in the exchange rate mangement and once again make the export competitivenss a non-issue. The Rupee stability is not the issue here, it is the flexibility of the Rupee to global demand and local supply situation that matters. Today the Rupee is maintained at a stable level to please the foreign investors in the Treasury Bills and Bonds which amount to more than US$ 3 billion. The market is surpressed by behind the scene interventions. The victim of this strategy are the exports of the country !

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