Using the yuan for bilateral China-Pakistan trade

By Sabena Siddiqui 
0 Comment(s)Print E-mail China.org.cn, January 18, 2018
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The decision by Pakistan to switch to use of the yuan in bilateral trade with China, replacing the U.S. dollar, is of great long-term significance for the Pakistani economy. [Xinhua]


Venturing to replace the U.S. dollar with the Chinese yuan for bilateral trade between Pakistan and China, the State Bank of Pakistan recently announced that all arrangements for the change-over were already in place. 

Having considered the Chinese proposal to use the renminbi for some time, a comprehensive bank policy was prepared whereby public and private enterprises in both countries can carry out financial activities in CNY. 

According to the official notification, "As per current foreign exchange regulations, the Chinese Yuan (CNY) is an approved foreign currency […] on a par with other international currencies such as the USD, Euro and JPY."

Considering the ongoing massive Chinese infrastructure project in Pakistan, the new facility would "yield long-term benefits for both the countries," the announcement added.

From now on, Pakistan's imports from China can be paid for in yuan rather than dollars. Not only that, Chinese companies investing in projects related to the China Pakistan Economic Corridor (CPEC) can bring in yuan-denominated funds that will yield profits in yuan. 

This facility is also available to non-Chinese companies involved in the CPEC. Additionally, the Industrial and Commercial Bank of China Ltd. (ICBC) in Pakistan has initiated a local yuan settlement and clearance arrangement so that yuan accounts can be opened to facilitate remittances and yuan-based transactions. 

As explained by the State Bank of Pakistan, "With the opening of Bank of China in Pakistan, the access to onshore Chinese markets will be further strengthened. Several banks in Pakistan can also maintain onshore yuan nostro accounts."

As a policy, the Long-Term Plan of the CPEC for 2017-30 visualizes the strengthening of financial bonds between the "all-weather strategic partners" by giving the yuan equal status to the dollar in Pakistan. 

Only recently, Minister for Planning and Development Ahsan Iqbal and the Chinese Ambassador Yao Jing formally announced the long-term plan of the CPEC along with other measures to complement it. Financial co-operation between free trade zones will be increased and the formation of a RMB backflow mechanism will be facilitated.

Describing China's long-term commitment, Ambassador Yao said there was room for improvement in the LTP if needed, "By no means is the LTP final and perfect, as it can be adjusted according to the ground realities." 

Until now, only the dollar was allowed for international trade by Pakistan's foreign exchange regime, and extending the same incentives to the yuan will take three years to implement. 

Justifying the practicality of using the Chinese currency, Pakistani economic analyst and former government adviser on finance Salman Shah explained that avoiding dollar transactions in the implementation of CPEC would "simplify matters very considerably" as the Chinese economy is now one of the biggest in the world.

A free trade agreement will further benefit exports from Pakistan and lessen its huge trade deficit. Setting up of a cross-border inter-bank system to facilitate clearance and settlement claims by financial institutions will be the next step, doing away with any need for the complex international clearing system based in London and New York. 

Assessed at $13.8 billion in financial year 2015-2016, bilateral trade would hugely benefit as CPEC projects continue until 2030. Easing pressure on the country's foreign exchange reserves and helping them rise with CNY, economic indicators will also improve as Pakistani imports from China are more than $10 billion. 

The free flow of capital and legitimate funds will also accelerate as this bilateral currency exchange kicks in. In the meantime, Pakistan will continue to use the rupee domestically.

Predictably, the switch-over to the yuan will not end here, even though in Pakistan's case it was a practical step as there are major projects underway. It is just a matter of time before the yuan goes truly international, as Chinese currency is more in use since the dim sum bond market was established by China in 2009. 

Eventually, more countries will make it the currency of choice for bilateral trade. Only recently, Indonesia and Malaysia have also reduced their dependence on the U.S. dollar. Further on, as the Belt and Road Initiative expands, the convenience of using local currencies will encourage more countries to become part of the trade connectivity project. 

Following China's economic reforms and open policy, even the IMF has given the yuan equal status to the U.S. dollar, Japanese yen and euro and right now it happens to be the third global-use currency after the dollar and the euro. 

Significantly, oil producing countries are also expected to announce the usage of the yuan for bilateral trade with China, vastly increasing its clout.

Sabena Siddiqui (Twitter: @sabena_siddiqi) is a foreign affairs journalist and lawyer based in Pakistan.


Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.


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