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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”.
Explore: Yuan proposal puzzles financial cirlces
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.
Published in Dawn, The Business and Finance Weekly, December 25th, 2017
Comments (48) Closed
The fundamental question remains unanswered that how will we earn yuan funds to repay all the yuan denominated obligations including the huge trade deficit with China. Our exports to China are hardly USD 2 billion against the imports of USD 10 billion from China. If we switch to RMB settlement, there will be a huge funding gap of equivalent to USD 8 billion, not to mention obligations under repayments of loans and dividends. If China sets up a system to provide yuan liquidity, again a very big question is about its cost? Will it be lower than the funding cost for US Dollars. At the moment., the answer is a big NO.
The Pakistan Rupee should be abolished and Chinese Yaun should be made the official currency of Pakistan.
Somebody explain what is the difference between depending on yuan and depending on dollar for bilateral trade. How these two dependencies are different?
....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....
Complete rubbish from this 'expert' author. Japanese Yen and British pound is ready a reserve currency, the chinese yuan is the 5th.
@IndianDude British Pound is getting pounded just look at the chart. Yes Japanese Yen is good currency but Japan debt problem is like no other place on the planet 200%+ Debt is a more than just a problem, when the Largest Japanese bank single biggest investor is China it show the whole picture. RMB is a good currency and they sure are better than INR or PKR both are far from world class currency.
IndoPak Blood Brothers 4 Life!
@Imtiaz Ali Khan just wait for BREXIT and then Pound will soar again.
Another Chinese rip off scene; USD interest rates are lower than Yuan interest rates.
This article does not state explicitly where PKR would be used. If yuan becomes the largely denominated currency for both borrowings and trades, than demand of yuan will rise and demand of PKR will fall. Simple economics dictate that if the demand of a currency falls, it will depreciate. And right now Pakistan is already reeling with inflation due to depreciation of PKR. Please negotiate better terms with the Chinese for mor use of PKR.
Next Finance Minister will be appointed by China?
Yuan is not even a fully convertible currency and so it's a compelete sell out by Pakistan to Chinese demands.
Today Yuan was accepted tomorrow Chinese will insist on flying their flag on Gwadar or using Mandarin on all CPEC forms, will Pakistan accept that too ?
@Mohajir Not a bad idea. I would go as far as suggesting that Pakistan abolish Finance minister post and just make it an extension of the Chinese Finance ministry reporting directly to China. This would cut costs and the need for protocol for yet another minister.
@Adnan that happens eventually.
@Nuer No, next FM will be chinese
It means Pakistan has failed as a nation.
First and foremost salam to all my brothers and sisters in pakistan . There are few points which i would like to discuss . 1. As yuan is not a fully convertible currency it is just kike giving chains to Chinese to pull the prjces at thier likes . 2. Dependence like this can mot be eridicated by changing the curencies 3. The trade balance has be maintained one way or they other to sustain . 4. Foriegn investment is the key to boost bop and reducing trade deficit .
I don't see how this benefits Pakistan. For China this is good as they want to promote Yuan all over the world. Pakistan will get their export income in USD and will have to convert it to Yuan and pay the Chinese.
Is it as beneficial to pakistan as it is to china? I dont think so
@Ashraf The Great Good idea what is the need to have a Finance Minister when Pakistan does not even have an economic plan (for the last so many years).
In the long term this will proof right to do business this way.
Though US dollar is flexible and full convertible currency, it has a cost for doing settlement in a third currency. For every 100 dollar of payment settlement between Pak-China and a certain percentage (upto 5% or more ?) is settlement/commission cost done through New York. In case of RMB/PKR for bilateral trade this settlement/commission will be removed. After CPEC there will be need of upto US$4 billion yearly loan and profit repatriation+ growing trade of US$12-16 billion per year so a huge burden for PKR/US$ parity and if these payments are settled in bilateral currencies, a huge savings. With CPEC LTP Chinese trade and investment in Pakistan will grow many folds in coming years, so there will not be much problem for bilateral payment settlements.
@Pakistan need to increase exports
There has been a great need of growing currency in South Asia because there could be big bursting of bubble that could be reduce by using like yuan. And another thing is that when there is Chinese industries in Pakistan and they will export to other countries it means Pakistan will receive dollars but settle the receivings in yuan to pak-based Chinese companies. This will have good effect overall.
@Mohajir : It's already happening!
@Hanif you are absolutely right! pak. shud. not get into this trap because your exports is very less compared to what you are or going to import from china, especialy CPEC being conectivity is thro"? secondly how anybody going to calcilate the exchange rate? they will again go by the vvisa vis value of dollar for the simple reason, 98% of countries use dollar for exchange commitments.! why china has accumulated 3 trillion us dollars is because they know the reality!!. now they are trying to fool, poor countries, by making them agree for yuan instead of us for thier own benfits!?
@Nuer Pakistani ministers will be replaced by Chinese.
@Mrityunjay Tripathi They are all same.
@Udayan Mitra But China is a friend, USA is not.
@Imtiaz Ali Khan But Chinese do not allow their own people to keep beards or fasting in the Ramadhan.
Why not have barter system with China? It could be valued in any currency but trade should be balanced. China buys as much as it sells to Pakistan.
Some facts for those who have a lot of misunderstanding on the subject.
1: Yuan is not convertible currency - Wrong. Yuan is as much convertible as dollar, Euro, Yen or pound.
2: Dollar debt costs less than Yuan debt. It depends. In recent years (since 2009), USA Fed interest rate was less than 1 percent, but it is rising (presently 1.5 percent). We should remember that in 1980s, USA fed interest rate on average was over 15 percent. Anyhow, since Pakistan credibility is low, Pakistan in late November raised $2.5 billion (issuing bonds) at around 7 percent.
IMF and World bank do give loan to Pakistan at discounted rate (due to American influence), but with lot of conditions attached.
As for Yuan, their base rate is around 4 percent and if Pakistan talks to China, they might get loan at around 4 to 5 percent interest rate. So, Pakistan debt in Yuan may cost as much or less than dollar debt.
Thus, for Pakistan long term interest, it is best to use Yuan than dollar.
This is the beginning of the colonisation of Pakistan.
excellent..now you can go full bore with money laundering.
So basically that means China will control how many Pakistani rupees will be needed to pay back debt. No third currency to baseline against. Sounds like sahukari or pathani loans. You know what happens next!
The money lender will extract his pound of flesh . Gilgit baltistan and gwadar will be Chinese property in less than 10 years
This is beginning of amalgamation
Sounds like one sided benefits to China. Chinese can easily manipulate the value of their own currency to make repayments more expensive for Pakistan
@Shazad You are living in fools paradise. Chinese Banks r charging 17% on all the loans given for CPEC projects.
Man why you are trying to make people of pakistan feel that there is something going on. Nothing is going on. China is not trying to take over.only china wants to make sure corrupt pakistani politicians would not be able to steal their money. That's it.china is well wisher of pakistan. So please sir don't try to upset pakistani people. Thanks
@Sam '@Shazad You are living in fools paradise. Chinese Banks r charging 17% on all the loans given for CPEC projects.'
You are wrong. In CPEC, there are two types of money coming to Pakistan. One is Chinese government loan for infrastructure and other is private investment (FDI), especially in energy sector (these are private investments).
For FDI in energy sector, Pakistan has offered guaranteed 17 percent rate of return (that includes commission or plundering of Pakistani wealth by PMLN leadership). This rate of return is high, still, not too high, as return on such investment around world is between 10 to 20 percent.
On the other hand, Pakistan is also getting soft loan from China for infrastructure (Roads, Ports, Railways, Bridges, etc) at interest rate of 1.6 percent, lower interest than what Pakistan pays to world bank for infrastructure loans (~3.8 percent ... and that also, with conditions attached).
Great, but why not make Yuan the permanent currency of Pakistan? Perhaps that will be the next step in Chinese colonization Plan.
Think we will have single currency for both friendly countries....
Why don't we pegged PKR with Yaun to avoid any issues?
This trend of using local currency is already experienced in SARK trade . Our traders may remit in Pak Rupee for their imports . It would be a good support to our trade with China .
@Hanif Very nicely put summary
@Mohajir.He Pakistanis are incapable to run their country with honesty and integrity then let China do so for tgm benefits of Tim Pakistani people.
Very bad news for Pakistan.
It seems like everyone is finance minister here. Most of these people are not even businessman.
Even non-Chinese companies participating in the CPEC will be able to do that via their Chinese principal companies, senior bankers explain.
So all participating CPEC companies must have a Chinese principal company.
What does Pakistan benefit by this scheme other than Chinese goodwill ? Are they doing for goodwill or bring thrust upon by the big brother?
What's next ? Learn mandarin, become another territory like HK or Taiwan ?