Home ›› 05 Oct 2022 ›› Editorial
Banks are finally allowed to maintain accounts in Chinese currency RMB with their correspondents or overseas branches for cross-border transactions executed in Bangladesh. The central bank’s foreign exchange policy department issued a circular on September 5, 2022. With this circular, the scope of paragraph 1, chapter 4; paragraph 24, chapter 7; and paragraph 5, chapter 8 of the Guidelines for Foreign Exchange Transactions-2018, Vol-1 shall stand extended.
Before the RMB inclusion, the authorised dealers of banks were allowed to open foreign currency clearing account with the central bank in currencies of five countries — US dollar, pound sterling, euro, Japanese yen and Canadian dollar. BB has also facilitated Bangladesh's foreign trade covering both export and import in RMB. Earlier on August 14, 2018, the central bank allowed the AD banks to open foreign currency clearing account with the BB in the RMB on the same grounds. Chinese currency is the best second international currency, as Bangladesh imports most from China, which emerges as the country's largest trade partner.
Bangladesh’s bilateral trade with China, or international trade, will no longer be dependent on the US$ thanks to the central bank’s latest move. Bangladesh’s businesses have recently urged the central bank to take measures so that dependency on the US$ can be reduced when settling transactions for foreign trade. Import payments to China stood at $18.51 billion in the last fiscal year, an increase from $12.93 billion in FY21. Besides, export earnings from China reached only $683.43 million in FY22, compared to $680.65 million
in FY21.
In recent years, the cross-border use of the RMB has sustained rapid growth and has maintained robust growth this year even despite the impact of the Covid-19 that has severely hit global trade, finance and economy. Overtaking the US, China became the world's largest trading nation in 2013, and the largest foreign direct investment (FDI) destination in 2014 and is expected to become the largest consumer market in 2030.
Meanwhile, China has introduced cross-border interbank payments system (CIPS) with the RMB as an alternative trading currency. CIPS payment system offers clearing and settlement services for participates in cross-border RMB payment and trade.
The Chinese currency was not very popular in international trade before 2021, but it gradually gained popularity when the European Union and US imposed sanctions on Russia over the Ukraine invasion. A Bangladesh Bank official said the government had declared the Chinese yuan or renminbi as a convertible currency in March 2014 by issuing a gadget notification. But many banks were still shying away from settling transactions of foreign trade through the currency, said the official.
The International Monetary Fund (IMF) had already included the Chinese currency in its currency basket - SDR (special drawing rights). RMB is increasingly used in cross-border payment and financing worldwide. More central banks hold RMB-denominated assets as reserves and the RMB as an invoicing currency witnessed remarkable progress. Now, the size of the RMB reserves is the 5th largest in the International Monetary Fund (IMF)'s Currency Composition of the Official Foreign Exchange Reserves (COFER). Besides, the market share of the RMB in the foreign exchange trading is 4.3 per cent, ranking 5th as a payment currency globally.
In 2019, the cross-border RMB settlement between China and the neighboring countries registered RMB 3.6 trillion yuan, among which the trade in goods amounted to RMB 994.5 billion yuan, and the direct investment amounted to RMB 351.2 billion yuan. Since 2008, China has signed the bilateral local currency settlement agreements with nine neighboring countries and the countries along the B&R such as Vietnam, Laos, Russia and Kazakhstan, and has signed the bilateral local currency swap agreements with the central banks or monetary authorities of 23 neighboring countries and the countries along the B&R such as Russia, Indonesia, the United Arab Emirates (the UAE), Egypt and Turkey. For international market participants this is reflected in less foreign exchange volatility marking RMB-denominated investments as the preferred asset class and currency in settling cross-border payments. Resumed business activity will also bolster support in the RMB as business confidence is restored. Recently, India has imported crude oil from Russian by paying with RMB to avoid any possible blocked of transaction by US sanction.
Experts also suggested that it is high time for the Bangladeshi government to go for direct communication with the China Development Bank (CDB) and avail the opportunity of using more RMB loans for mega Bangladesh products. I will increase the inflow of RMB to Bangladesh.
Currently, a few banks have Nostro accounts with China but those are not used for payment as 99% of foreign transactions are done in dollars. Bangladeshi banks are looking for Chinese payment channels to settle transactions with Russian banks that were removed from the SWIFT system to remedy difficulties faced by importers and exporters after Western sanctions following Russia's attack on Ukraine.
Now, the exporters and importers would be able to get rid of the costs that arise due to exchange of currency from Chinese yuan to the US dollar and then to Bangladeshi currency taka while conducting bilateral trade. Opening letters of credit in the Chinese currency against import might help contain the growing pressure over the US dollar on the back of sharp increase in import payments, they said.
The growing pressure over the dollar and the subsequent increase in the currency’s exchange rate were also amplifying risk of inflation. Apart from the benefits for business-to-business trade, the government to government payments would also be benefited due to the new facility of opening foreign currency clearing account in Chinese yuan, they added.
The monopolistic dominance of the US$ would have resulted in an unhealthy competition in world trade. As the RMB's function as settlement currency has been consolidated, the function as denomination currency has been brought into play, and the attractiveness of the RMB for financing gradually emerged, in the future it is expected to see the introduction of more robust measures to shore up and strengthen the currency. Long-term outlooks hold that the Chinese RMB will be one of the three currencies used for worldwide currency exchange in addition to EUR and US Dollar.
The writer is Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at mssiddiqui2035@gmail.com
