A NEW set of regulations issued by the Chinese authorities, and announced on the website of the People’s Bank of China a few days ago, provides more insight into the future path towards expanding the role of the yuan in China’s external economic relations. The scope of the new notice issued by the PBC is impressive, and since Pakistan is one of the countries whose external economic relations are going to be part of this development, it is crucial that the regulations be studied carefully by the government and monetary authorities here, followed by an appropriate debate around the merits and demerits of the changes implied. The sheer scale of the investments coming to Pakistan from China is reason enough to regard all changes, however minor they may appear initially, with due seriousness in order to be better prepared for their impact on the external account.

In this case the regulatory notice posted by the PBC suggests a vast expansion in the role of the yuan to settle all business involving Chinese enterprises abroad. The notice says, for example, that all profits and dividends can be repatriated in yuan, as well as all employee compensation and payments to vendors and remittances by individuals resident overseas wishing to send their earnings back to China. It permits “RMB funds raised by domestic enterprises through issuing bonds or shares overseas [to] be transferred back to China whenever necessary”. Clearly, the Chinese authorities are rolling out a slew of mechanisms that greatly expand and build on the cross-border currency swap arrangements that they have been building with a growing list of countries since 2009. This is important news for Pakistan, because it implies that increasing amounts of our external payments will be settled in yuan rather than US dollars as is currently the case. When that transformation begins in earnest, an important question will arise: how will Pakistan earn the yuan in order to build sufficient reserves with which to make these payments? In the case of dollars, the persistent deficit on our current account has been met with borrowing, causing us to lose increasing amounts of our economic sovereignty to our creditors, whether private, government or multilateral. Now that this external dependence is going to swivel in a different direction, has the appropriate work been done to assess the impact it will have on our own economic management?

Published in Dawn, January 14th, 2018