Exploring a new tool for promotion of trade with China
Since December 2008, China has advanced in its approach of implementing bilateral currency swap arrangements with its trading partners. The RMB Currency Swap arrangements would not only “promote bilateral trade but enhance direct investment,” as mentioned in one of its brief statements on the website of The People’s Bank of China (www.pbc.gov.cn).
These innovative currency swap arrangements would serve as a key pillar of co-operation between the Chinese central bank (The People’s Bank of China) and the respective state banks to strengthen regional economic ties and financial stability.
China has already signed currency swap agreements in various forms with eight of its trading partners including South Korea (RMB 180 billion or US$26 billion), Hong
Kong, Malaysia (US$ 16 billion), Belarus (US$2.9 billion), Indonesia (US$14.6 billion),
Argentina (US$10.2 billion), Brazil, Iceland (US$513 million) in June 2010 and more recently with Singapore (RMB 150 billion or US$ 22 billion) in July 2010. This has enabled these countries to place orders for Chinese imports in RMB rather than dollars.
At present, public announcements of RMB swap agreements have totalled more than
US$100 billion (RMB 700 billion).
A currency swap between countries is basically a foreign exchange agreement where one currency is traded for another for a negotiated period of time. In essence, the swap is like a loan where one country gives its currency to another in return for an equal amount of the other country’s currency at a later date. For example, the US Federal Reserve has been carrying out currency swaps for years in conjunction with IMF loan programmes to support developing nations which require immediate financial assistance.
Most developing nations including Pakistan utilise their US dollar reserves or sell state gold to buy US dollars in order to pay their Chinese trade accounts. However, if the currency swap arrangement is implemented, this would no longer be necessary. With such a swap arrangement, US dollar reserves could be used for other accounts, currency support or international commodity purchases.
In Septemebr 2009, the daily newspaper Dawn stated that if such a currency swap arrangement was concluded between Pakistan and China, this would enable the two countries to do business in rupee and Yuan RMB thereby lowering reliance on US dollars and helping to diversify foreign exchange reserves.
Finance experts in Pakistan believe that currency swap would ease liquidity issues for Pakistan and conserve our dollar reserves. Additionally, it would lower transaction costs and avoid the risk of fluctuations in exchange rates. Switching from billing our Chinese customers in US dollars to billing them in RMB would also bring opportunities to expand our trade margins, while also reducing risks and hedging costs.
However, some analysts are of the view that using the PKR or RMB as an invoicing currency instead of the US dollar would initially pose new risks to businesses in both countries that most government officials may not fully appreciate or understand. Currency experts believe that both the currencies of RMB and PKR are not nearly as liquid as the US dollar. The Chinese currency is not really traded outside of China except in a few countries mentioned above and the Pakistani PKR has liquidity to speak of.
No doubt, it would be in the interest of both our countries to settle trade flows in their own currencies. But at the moment, neither country’s financial system is really prepared for this swap! Although China has been working towards making its currency more convertible for the last two years, more still needs to be done.
Given the robust state of China’s economy when compared with the current condition of other important trade nations such as the US and the UK, it seems reasonable to assume that the RMB would continue to be robust as a currency as well. Hence, it would be an important move to sign the RMB Currency Swap arrangement with China soon.