Pakistan's central bank, State Bank of Pakistan has allowed the Chinese Yuan to be used for bilateral trade and investment activities, a move which could replace the US dollar for transactions in the strategic CPEC projects. The State Bank of Pakistan (SBP) said that all arrangements for using the Chinese currency for trade and investment were already in place.
Backgrounds
Firstly, the announcement came as part of the signing of a new Long Term Plan (LTP) 2017-30 in the second week of December.
The currency swap agreement was signed earlier between Islamabad and Beijing in 2011, allowing both countries to make transactions in either Pakistani rupee or Chinese Yuan. According to the agreement, the State Bank of Pakistan (SBP) can take a loan of as much as 10 billion Yuan from the Peoples Bank of China and can return the loan by giving Rs140 billion. As a result of the agreement, Pakistani foreign reserves would receive Chinese Yuan which would be provided to the banks.
The SBP has already put in place the required regulatory framework which facilitates the use of Yuan in trade and investment transactions such as opening of letter of credits (LCs) and availing of financing facilities in Yuan.
After signing a Currency Swap Agreement (CSA) with China's apex bank, the People's Bank of China (PBoC) in 2012, the bank had taken a series of steps to promote use of Yuan in Pakistan for bilateral trade and investment with China.
In terms of regulations in Pakistan, Yuan is on par with other international currencies such as dollar, euro and Japanese yen. In the financial year 2017, Pakistan exported goods and services worth USD 1.62 billion while the imports from China were USD 10.57 billion, reflecting a great imbalance.
Why does China insist on this?
Currency swaps arrangements by China are however prompted by a desire to internationalise the renminbi. The People’s Bank of China has 24 active currency agreements to the tune of RMB 2.71 trillion. For instance, it has one with the European Bank to a tune of 350 billion yuan. That’s hardly comparable to the 10 billion yuan in Pakistan. Sheer size of the CPEC portfolio is another cause, which the currency swap is aimed at promoting. This has grown more than $60 billion.
Implications
Pakistan’s Minister for Planning and Development Ahsan Iqbal struck a note of caution, clarifying that even while the currency swap would facilitate the growth of the China-Pakistan Economic Corridor, the Yuan would not be used inside Pakistan.
This is a sign of suspicion towards Yuan. It is indubitable to understand that common public, which are worried and terrified about the local industry and trade due to the emerging Chinese inflow of cheap goods in local markets through CPEC, how much intimidated by this agreement.