Abstract：With the increasing complexity of international situation and the frequent occurrence of black swan events, global economic policy uncertainty has been rising, leading to significant shocks in the international capital markets. In order to promote international cooperation and financial stability, China has been committed to a win-win strategy to forge a new type of international relationship featuring mutual respect, fairness and justice, and win-win cooperation. As regards currency cooperation, by the end of 2020, the People’s Bank of China had signed bilateral currency swap agreements worth of 3.99 trillion yuan with the central bank or monetary authorities of 40 countries and regions. During the period of economic policy uncertainty, it is highly significant to contribute Chinese wisdom and power to the improvement of global financial governance by answering the question of whether and how RMB swap agreements can promote the stability of international capital markets.
RMB has become the world’s largest currency swap circle. However, most studies on RMB swap agreements mainly focus on promoting the development of international trade and speeding up the process of RMB internationalization, and there lacks evidences about the impacts of RMB swap agreements on the international spillover effects of economic policy uncertainty. By shedding spotlight on global equity markets, this paper examines whether RMB swap agreements are effective in mitigating the shocks of global economic policy uncertainty on the international equity markets. The conclusions of this paper are as follows. First, rising global economic policy uncertainty can cause substantially high international volatility in the global stock markets, while RMB swap agreements can effectively mitigate the negative impacts of global economic policy uncertainty shocks on the international stock markets, and such adjustment is robust to alternative measures, different specifications and reduced samples. Second, the decline of the real effective exchange rate volatility is one possible channel through which RMB swap agreements can work. Third, there exist asymmetrical adjustments of RMB swap agreements under different levels of economic policy uncertainty, which becomes more pronounced under a high level of economic policy uncertainty. Forth, heterogeneity analysis shows that the effect of the adjustment is particularly pronounced in subsamples with developing countries, African countries and Europe countries.
This paper makes a significant contribution to the existing literature as follows. Previous studies mainly focus on the measurement of economic policy uncertainty and its spillover effects on the global markets, while ignoring the role of monetary cooperation in preventing instability of the international financial markets. This paper answers the question of the effect of RMB swap agreements on the international equity market stability under economic policy uncertainty, which enriches the literature on not only the influence of economic policy uncertainty and countermeasures, but also the role of bilateral currency swap agreements. In addition, our findings have important policy implications. As increasing RMB swap agreements plays a significant role in promoting international capital market stability under a high level of economic policy uncertainty, all economies, especially emerging markets, should sign currency swap agreements more actively in order to stabilize exchange rate, reduce international capital market volatility, and enhance bilateral economic cooperation. At the same time, China can continue to expand the scope of RMB swap agreements and improve relevant rules, including a larger maximum size and longer validity. In addition, it is important for China to steadily push forward the process of RMB internationalization, create a global partnership on connectivity, build a community of shared future for the mankind, and strengthen China’s contribution to the reform of the global governance system.
