RMB Bilateral Swap Agreements: how China chooses its partners?

As part of the measures taken to foster the internationalization of the RMB, China has signed RMB Bilateral Swap Agreements (BSAs) with a number of countries. Although the Chinese Government has stressed the importance of trade as the key driver of signing RMB BSAs, its validity hasn’t been tested yet. This paper analyzes empirically the key determinants for China to choose its RMB BSA partners. We find that the gravity factors are predominant (closeness to China and a bigger size increase a country’s likelihood of signing an RMB BSA). In addition, closer trade links also have a positive impact on China’s choice of BSA partners, as claimed by the authorities. Institutional strength is not relevant although China does seem to have a preference for countries with a sovereign default history and financial closedness.