Source: Ardiin Erkh, The Wall Street Journal, Xinhua                        Date: 11 May, 2011

The swap agreement between the central banks of China and Mongolia on exchanging national currencies was signed on Friday morning last week, a day later than scheduled as the plane from Beijing was delayed because of the weather. The deal is for USD770 million and will be valid for three years, extendable by mutual consent. The agreement comes after two years of negotiation, and is aimed at promoting bilateral trade and offering short-term liquidity to the two countries' financial systems.

Central Bank President L. Purevdorj said at the signing ceremony that the deal would help stabilize the MNT against the CNY by allowing the yuan into Mongolia's foreign market in emergency situations. CNY is currently the second most actively traded currency in Mongolia's foreign exchange market, he said, adding that Mongolia will have a stronger demand for the yuan as bilateral ties in trade, economy and investment become closer. Chinese central banker Zhou Xiaochuan said the deal would contribute to the financial stability in both countries and promote bilateral trade and investment.

China has stepped up efforts to promote the yuan's use in cross-border trade and finance to reduce its reliance on the U.S. dollar in the wake of the global financial crisis. So far, it has signed currency swap agreements with 11 countries and regions with a combined value of CNY834.2 billion. They include South Korea, Malaysia, Indonesia, Belarus and Argentina. The increased circulation of yuan offshore is also key to China's efforts to internationalize its currency.

Though the volume of yuan-denominated trade remains low, it is growing rapidly. About 7% of China's foreign trade in the first quarter was conducted using yuan, up from 0.5% a year earlier, according to data from the PBOC's quarterly monetary policy report released last week. In 2009, Beijing began allowing exporters and importers in certain regions to use yuan to buy or sell goods abroad, and China's central bank will expand the trial to the whole nation this year, local media reported last month, citing a PBOC official.  Most yuan-based trade deals so far have involved Chinese companies using the Chinese currency to buy goods. Around 89% of yuan trade in the first quarter was accounted for by China's imports, according to data from the PBOC.