ISLAMABAD/BEIJING - China has given Pakistan a credit line worth $1.6 billion to stave off a balance of payments crisis, two State Bank of Pakistan sources said on Thursday, with cash earmarked for boosting fast-depleting foreign currency reserves.

Two SBP sources told Reuters the credit facility that accompanies a currency swap agreement between SBP and China’s central bank has been hiked to 20b yuan ($3.13b) from 10b yuan. “This arrangement has been finalised,” said one SBP source, who spoke on condition of anonymity. A second source confirmed the agreement and the figures. Meanwhile, The People's Bank of China, the country's central bank, said Thursday it had extended a currency swap agreement with the State Bank of Pakistan. The swap is sized at 20 billion yuan (3.1b US dollars) or 351 billion Pakistani rupees, according to a statement from the bank.

The two parties believe the extension will facilitate bilateral trade and investment to help economic development in the two countries.

Valid for three years, the agreement can be extended upon mutual consent. A currency swap deal allows two institutions to exchange payments in one currency for equivalent amounts in the other to facilitate bilateral trade settlements and provide liquidity support to financial markets. 

China and Pakistan have made a great headway giving banking support to their growing socio-economic partnership.

After establishing its first branch in Karachi last November, the Bank of China formally launched a clearing and settlement mechanism of Chinese yuan.

Having received clearance from the State Bank of Pakistan (SBP) for denominating foreign-currency transactions, one of the main targets of the Long-Term Plan of the China-Pakistan Economic Corridor for 2017-30 has been achieved.

According to a media’s report, giving the yuan equal status to the US dollar in Pakistan strengthens the financial bonds between these "all-weather strategic partners." Up to now, Pakistan's foreign-exchange regime conducted international trade only in dollars. Working on changing over to bilateral trade in yuan with China, the SBP has been gradually enforcing and organising the switch-over.

Expecting the new mechanism to cut costs greatly and speed up efficiency for yuan transactions and enhance market liquidity, the SBP believes this arrangement will elevate the trade relationship between Pakistan and China.

Back in 2012, the first currency swap agreement was signed by the SBP with the People's Bank of China, and this was followed up by allowing banks to give trade loans in yuan and also accept deposits in the Chinese currency.

Devising a loan mechanism for banks to get yuan financing, the SBP initially allowed ICBC (Industrial and Commercial Bank of China) Pakistan to start offering services in 2015.

Though this was on a relatively small scale, the groundwork had begun to promote bilateral trade and investment in the respective local currencies.

Now the Bank of China is the second Chinese bank to enter the Pakistani market, but it is much more significant as it has fourth and fifth global ranking currently in terms of Tier 1 capital and total assets respectively.