IT has finally been officially confirmed that Pakistan is considering using the Chinese currency for bilateral trade.
At
a weekly media briefing on Dec 21, Foreign Office spokesman Dr Muhammad
Faisal said Pakistan and China “will actively use bilateral currencies
for the settlement of bilateral trade and investment (transactions)
under the relevant arrangements”.
In
response to a supplementary question, he said, “The two countries aim
to promote monetary cooperation between the central banks, implement
existing currency-swap arrangements, research to expand the amount of
currency and explore to enrich the use and scope of bilateral currency
swap [and] assign the foreign currency to domestic banks through
credit-based bids to support the financing for projects along the CPEC
[China-Pakistan Economic Corridor].”
This means Pakistani
and Chinese banks will, in the course of time, be able to open import
letters of credit in rupees and yuan (also known as renminbi, or RMB).
Moreover, Pakistan will be able to pay for imports from China in yuan
rather than in dollars, and Chinese companies investing in CPEC projects
will bring in yuan-denominated funds here and remit back their profits
and dividends also in yuan instead of dollars or other foreign
currencies.
Even non-Chinese companies participating in
the CPEC will be able to do that via their Chinese principal companies,
senior bankers explain.
“The dollar may remain the most
dominating medium of exchange in the foreseeable future. But if
Islamabad and Beijing can materialise their dream (to settle bilateral
trade and investment transactions in rupees and yuan), we can reduce our
dependence on the greenback gradually over a long time,” says the head
of a large local bank.
There is a growing trend towards
promoting the use of local currencies to settle transactions between two
or more countries, as countries seem eager to reduce their
overdependence on the US dollar.
As recently as on Dec
11, the central banks of Indonesia, Malaysia and Thailand introduced a
framework to boost direct settlement of transactions in their local
currencies.
And this makes more sense in the case of Pakistan and China under the CPEC.
Emboldened
by its growing global economic clout and out of the necessity to make
the yuan a stronger international medium of exchange, China launched a
pilot project back in July 2009 to use yuan for cross-border
settlements.
The scheme was then developed into a
full-fledged framework the very next year, and now hundreds of thousands
of Chinese companies transact businesses in yuan with their partners in
Hong Kong and some countries of the Association of Southeast Asian
Nations.
Besides, after the yuan attained the status of a
global reserve currency — the third one after the US dollar and the
euro — on Nov 30, 2016, China speeded up efforts for greater use of its
own currency for settling transactions with other nations.
For
Pakistan, the rupee-yuan settlement of trade with China is important
because “it would reduce our needs for US dollars to a significant
extent as our imports from China are in excess of $10bn”, explains a
central banker.
Initially, even if 25pc of our imports
from China are to be financed in yuan, our dollar requirements would
decline by $2.5bn within a year.
But, of course, there’s
many a slip ‘twixt cup and lip. “The Chinese banking system is used to
handling transactions in yuan and other regional currencies (of the
countries with which direct settlement of transactions are going on),
but we are not,” a treasurer of a local bank says.
The
State Bank of Pakistan (SBP) may come up with a framework for this
purpose in some weeks or hardly a few months, but for banks to get used
to the new system will be a challenge, he says. “An even bigger
challenge for bankers will be to explain it to businessmen how the
rupee-yuan settlement of transactions would work and how their
businesses would benefit from it.”
Bankers recall that
there was no big response when the SBP invited bids in 2013 for buying
yuan by local banks under a bilateral currency-swap arrangement, which
was initially signed in December 2011.
That swap was
worth Rs140bn and 10bn yuan. Many bank treasurers don’t exactly remember
any activity undertaken so far under this currency-swap framework.
“But
as we are entering 2018, things have changed a lot. The country is
struggling with its external account imbalance and, thanks to CPEC,
investment and trade (read imports) activity is growing rapidly,” a
local bank treasurer says. “So, enlarging the scope of the currency swap
and utilising it for settling trade and investment transactions between
Pakistan and China can really help in keeping external-sector problems
in check.”
Now, as we badly need yuan to foot the growing
Chinese import bill so that growth in imports and other
foreign-currency obligations does not create an unmanageable need for US
dollars, only enlarging the amount of rupee-yuan swaps will not be
enough.
“What is perhaps more necessary is to sensitise
banks and businesses about it and make sure that when the yuan is
auctioned in the interbank market for swap against the rupee, banks
participate in a big way and they actually do this on the back of
corporate-driven demand,” a forex dealer at a local bank says.
As
a next step, promoting the clearance and settlement of claims of
financial institutions through a cross-border interbank payment system
is also a must. And Pakistan and China have already agreed upon doing
this, according to the Foreign Office spokesman.
Once
concrete developments are made in this regard, the free flow of capital
and cross-border transfer of legitimate funds between the two countries
would become easier, reducing the need for more complex centralised
international clearing system in New York and London.