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Utilising bilateral currency swaps

July 23, 2012


— Illustration by Khalida Haq
— Illustration by Khalida Haq

Some large local banks have begun exploring ways to finance part of trade with China in currencies of the two states under a 3-year swap agreement worth equivalent to $1.6 billion.

“We are in touch with corresponding banks operating in China and will soon start processing yuan-denominated imports letters of credit and rupee-denominated export documents,” said a senior executive of a large local bank. Executives of other local banks gave a similar reply but none confirmed if trade financing under CSA had started.

Businessmen who trade with China say they continue to make inquiries on how they can start dollar-free trade transactions with their clients in Beijing but it appears that banks are still busy doing some spadework.

“Working out details of what to do and how to do takes some time. By the end of this year banks would be processing dollar-free import letters of credit and export documents,” said an official of Pakistan Banks Association. He informed that the CSA, signed between the central banks of Pakistan and China late last year, also covered investment financing in local currencies of the two countries.

“Part of foreign direct investment from China in Pakistan can now be easily processed under CSA for which the SBP has clarified basic concepts. Chinese investors already operating in Pakistan can also get the rupee equivalent here while making additional investment in their ongoing projects. I guess ICBC (Industrial Commercial Bank of China) in Pakistan is already working on it.”

Bankers say once the Bank of China or BOC (another Chinese commercial bank) enters into Pakistan, the progress on trade and investment financing under CSA would pick up pace. BOC management wants to open their bank’s branches in Pakistan but fulfilling the requirements for this purpose may take some time.

Pakistani banks have a long history of presence in China and currently at least five banks including the state-run National Bank of Pakistan have their representative offices in Beijing. The other four are Habib Bank, United Bank, MCB Bank and Askari Bank. “As for our bankers, they have long experience of Chinese markets and they can easily utilise CSA for trade and investment financing under relevant SBP rules,” said a former senior executive of NBP.

“But Chinese banking experience in Pakistan is very limited. ICBC has just entered here (in August 2011). It is almost certain that real progress on Pakistan-China CSA would be made only when Chinese banks or Chinese businessmen show interest in trading in the respective currencies of the two countries.”

“Chinese Renminbi (yuan) is being increasingly used to settle trade transactions. Over time, it could become an anchor currency, helping the region to integrate their economies, cooperate on monetary and finance issues as well as gradually open up the PRC financial market,” noted the Asian Development Bank in a recently released report.

In recent years China has worked so energetically on making the yuan an acceptable currency for trade transactions across continents that 10 per cent of its total trade is now yuan-denominated.

China has so far signed local currency swap agreements (CSAs) with at least 15 countries including Pakistan, Australia, Argentina, Belarus, Hong Kong, Indonesia, Japan, Kazakhstan, Malaysia, New Zealand, Singapore, South Korea, Thailand, Turkey and Uzbekistan.

“Interest is growing”—not just among China’s neighbours, but also in North America, Europe and the Middle East—to add the yuan to their foreign exchange reserves, said Hu Xiaolian, a deputy governor of the People’s Bank of China, at a forum in Shanghai last month.

In recent months, central banks of Japan, South Korea, Nigeria, and Saudi Arabia have announced or indicated plans to diversify their reserves into the yuan. Whether SBP is also maintaining any portion of its forex reserves in Chinese currency or if it has such plans is not officially known. But central bankers say that Pakistan’s reserves are not wholly concentrated in dollars and dollar-denominated treasuries and bonds. They say that some portion of the SBP’s reserves are also in other global currencies but do not specify them.

Central bankers also say that the CSA signed with Chinese central bank is operational in that after it’s signing on December 23, 2011 the SBP has got the authority to draw on a fixed swap-line of 10 billion worth of yuan to provide the Chinese currency to banks in Pakistan who might need them for settling yuan-denominated trade and investment transactions. Similarly, PBC has the liberty to do the same with a fixed swap-line of Rs140 billion.

Utilising CSA with China or the one with Turkey has become crucial now to ease pressure off the SBP’s foreign exchange reserves in the wake of expanding current account deficit which crossed $4.5 billion in the last fiscal year. A month before signing of Pak-China CSA, central banks of Pakistan and Turkey had also signed a three-year bilateral CSA (worth equivalent to $1bn).