The impact of China's bilateral currency swap agreements on bilateral direct investments

This paper investigates the impact of China's bilateral currency swap agreements (BSAs) on bilateral direct investments (BDIs). We treat signing China's BSAs as a quasi-natural experiment and employ the gravity model with a staggered difference-in-differences (DID) method to explore the relationship between signing China's BSAs and BDIs. Our empirical results suggest that signing China's BSAs and increasing their value can effectively boost BDIs. The findings remain robust after utilizing the propensity score matching DID (PSM-DID) method, the instrumental variable method, adding additional explanatory variables, and eliminating interference from critical events. In addition, we find that the impact of China's BSAs on BDIs varies significantly depending on partner country features, such as level of development, whether to sign the Belt and Road Initiative (BRI), trade relations with China, and the degree of capital account openness. Moreover, the governance quality in the host country has a positive moderating effect on the impact of China's BSAs on the country's FDI. Our study has vital policy implications for governments worldwide that have signed China's BSAs and those that want to promote BDIs by signing China's BSAs.