Chinese currency swat

Nope! that is not a misspell. It is in fact exactly what happened to first Chinese currency swap auction held on June 4: it was swatted down by the market.
To provide a quick recap for those who were lost in budget and other affairs, the bilateral currency swap agreement with China was in talks for over a year. It has become operational now; well, at least theoretically.
The swap contract worth Chinese Yuan (CNY) 10 billion and Rs140 billion was aimed at boosting the mutual trade between China and Pakistan. The idea is to enable both the sides deal directly in their own currencies instead of getting into the hassle of settling the letter of credits in US dollars.
With all eyes on the budget and post budget discussions, the auction threw a major surprise which went largely unnoticed. There was zero participation witnessed by the market in the three-month and six-month Chinese Yuan (CNY) auctions.
BR Research inquired the stakeholders and the view from the surface emerged that the swap offers no apparent incentive to buy CNY. Thats because the CNY swap is available at the rate of 6-6.5 percent given the interest rates currently prevailing in China. The US dollar financing, on the other hand, is available at a much cheaper rate of 1.5 - 2 percent, based on interest rates in the US.
The bankers highlight that due to fairly high level of the minimum required participation in the auctions, the banks could not garner utmost market participation. However, they are optimistic that the participation would pick up pace, partially on account of the difference in volatility between CNY and USD.
CNY is a fairly stable currency because of its dirty float (managed float) nature. Although USD financing is available at a lower rate, the currency is far more fluctuating in nature than CNY, due to borrowers are exposed to currency risk.
The trader community underpinned that most of their Chinese trading partners denominate their contracts in USD; hence, currently, they have no reason to borrow CNY. However, there is nonetheless a belief that it is a positive development in the longer run. That said, a large number of small traders still appear to be completely unaware of the facility, which should make the central bank stand up and take notice.
The concerned authorities at SBP informed BR Research that the auctions were held to create a buzz in the market. The low participation was predicted as the operational process takes time. The banks will need to overhaul their Nostro accounts accordingly with the clients needed to negotiate the terms with their trading partners.
The central bankers further underlined that the auctions will be held every two months. They are pretty confident that the participation would boost in the third to fourth auction. However, given the dismal participation in the first auction, it appears that a lot more needs to be done on the awareness front so as to bring even the small traders in the net and muster greater participation.