* China rolling out more and more yuan currency swaps
* Aim is to tackle crisis-related drought in trade finance
* Swaps suit Beijing's political as well as economic goals
By Simon Rabinovitch and Aileen Wang
BEIJING, March 27 (Reuters) - To great acclaim from its neighbours, Beijing has opened a series of currency swap lines with Asian countries in need, but the biggest beneficiaries of the largesse might be China's own beleaguered exporters.
Unlike typical swaps between central banks, China's newly inked deals -- five in all, totalling 580 billion yuan ($85 billion) -- can do little to support currencies against depreciation.
If countries, from South Korea to Indonesia, call on the yuan offered by China, they would not be able to sell it for won or rupiah, because the Chinese currency is not fully convertible. And according to the terms of the swaps, recipient central banks say they cannot exchange the yuan for a slice of China's vast dollar holdings in its $2 trillion of foreign exchange reserves.
Rather, the yuan can serve one main purpose: buying goods made in China. It can also be used for direct investment, though such flows are dwarfed by trade volumes.
"The primary goal is to promote exports, because with U.S. dollar liquidity tight globally, some of China's trade partners have run into trade settlement difficulties," said Charles Su, chief macroeconomic analyst at research group CEBM in Beijing.
Trade between China and its neighbours, even Hong Kong, has traditionally been settled in dollars, so the global greenback drought has pulled the rug out from under Chinese exporters.
"Using renminbi swaps to stabilise mutual trade is a way to confront the financial crisis," Su said.
Chinese exports plunged 25.7 percent in February from a year earlier, marking the fourth consecutive month of decline and weighing more on the country's growth than its domestic slowdown.
It is against this backdrop that China has signed the currency swaps: 200 billion yuan with Hong Kong, 180 billion yuan with South Korea, 100 billion yuan with Indonesia, 80 billion yuan with Malaysia and 20 billion yuan with Belarus. For factbox, double-click on: [ID:nPEK20594]
STIMULATING TRADE
Anything to get trade flows going again would undoubtedly be good for all involved, not just Chinese exporters.
In fact, of China's five swap lines, two are with countries (South Korea and Malaysia) that run a net surplus in their trade with China. Imports and exports with another, Indonesia, are roughly balanced.
The bilateral swaps will open up a vital new financing channel for firms, Boediono, Indonesia's central bank governor, said. Indonesian importers buying from China will be able to obtain yuan from banks appointed by the central bank to provide the Chinese currency.
"They will not need U.S. dollars. They can go straight and use the currencies of both countries," he said. "It is not easy to reduce dependence on the U.S. dollar in the near term. One small step would be through bilateral currency swaps."
A recent International Monetary Fund study found that trade financing constraints were hindering 6-10 percent of developing country trade. Globally, the World Bank reckons the shortfall in trade finance could be as high as $300 billion. [ID:nLJ605500]
But the immediate concern of central banks activating swap lines is often to stabilise their own currencies; promoting trade is at most a secondary objective.
Indirectly, the Chinese swaps offer some help on the currency front. Insofar as buying Chinese goods in yuan frees up dollars that would have been needed for trade transactions, more dollars are available for other purposes, such as intervening in currency markets or paying off foreign debts.
But even using yuan for trade alone may be difficult.
In South Korea, the yuan is hardly used as a trade settlement currency and that cannot be changed overnight. Media reports say the Bank of Korea wants to transform part of the swap into a won-dollar arrangement.
SPREADING THE YUAN
Apart from boosting trade, many think that China also has longer-term political and economic objectives.
"The swaps not only lend support to neighbouring economies but also help improve the renminbi's international position, quickening the process of its becoming a major regional or even world currency," said Nie Wen, an analyst at Fortune Trust Co in Shanghai.
Encouraged by the swaps, it will become more common for China and others in Asia to settle trade in yuan, he said.
For Hong Kong, that day could be just around the corner. It is expected to finalise soon an agreement with China that will allow firms to use the yuan for trade between the city and Guangdong province.
That would make it the first place beyond the borders of mainland China to allow large-scale trade settlement in yuan; Beijing has said it will also conduct trials in southeast Asia.
China, for its part, has been very honest about the role that the swaps can play in alleviating the financial crisis.
In announcing the swap with Indonesia on Monday, China's central bank said it would "support bilateral trade and direct investment in order to help boost economic growth and provide short-term liquidity to stabilise the financial market".
The path to financial stability envisaged in the swaps runs via trade and direct investment, not currency intervention. ($1=6.832 Yuan) (Additional reporting by Adriana Nina Kusuma in Jakarta, Yoo Choonsik in Seoul and Varsha Tickoo in Kuala Lumpur; Editing by Alan Wheatley)