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Monetary cooperation between Bangladesh and China

M S Siddiqui
23 Nov 2022 00:06:35 | Update: 23 Nov 2022 00:06:35
Monetary cooperation between Bangladesh and China

After independence, Bangladesh government fixed the exchange rate of Taka with the British pound sterling in January 1972. Authority gradually opted for the dual exchange rate system of Pound starling and US Dollar. Finally, the pound sterling replaced with that USD as the intervention currency in 1983. BB at one stage allowed ADs to maintain accounts in freely convertible currencies with their correspondents/branches abroad subject to compliance with AML-CFT regulations of Bangladesh Bank and other competent authorities. At present all the convertible currencies such as USD, GBP, Euro, JPY, CHY, CND can be used to make and receive international trade payments in the country.

Therefore, US dollar is playing a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. But other currency is emerging in the market. The euro is gradually playing a large role and the renminbi, with a rising role. It is for sure that making payment through USD to all trading partners might involve transaction costs in the process of currency conversion, and there are inherent exchange rate risks. However, using home currencies and holding extensive volume of multiple currencies (other than USD) involve other risks and complexities.

In 2018, Bangladesh Bank allowed banks to open clearing accounts in the Chinese currency which has been the largest source of import for Bangladesh since fiscal 2006-07. Thus, banks should be able to settle imports from China easily through the clearing accounts. Before that, banks were already allowed to open such accounts in US dollar, British pound, Euro, Japanese yen and Canadian dollar with the Bangladesh Bank.

The Chinese RMB is seen as another potential competitor to the dollar in trade invoicing, as China has become the world's largest exporting nation. Chinese authorities have launched several initiatives to promote the internationalization of their currency. The use of RMB in trade invoicing has started to rise along with the emergence of China as a major player in the world economy. These increases have been conned to regions where trade with China has grown most significantly, such as South-East/East Asia, the Oceania/Pacific region and Sub-Saharan Africa.

The People's Bank of China's global network of currency swap lines has been associated with increases in renminbi invoicing, at least in countries for which China accounts for a large share of trade. The bilateral currency and financial cooperation between China and neighboring countries and the countries along the B&R getting constantly deepened. 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 (UAE), Egypt and Turkey.

By the end of 2019, China's central bank, the People's Bank of China (PBC), has signed bilateral currency swap agreements with the central banks or monetary authorities of 39 countries and regions, covering major developed and emerging economies in the world, as well as the major offshore RMB markets, totaling more than RMB 3.7 trillion yuan.

In 2019, the PBC renewed the bilateral local currency swap agreements with the Centrale Bank van Suriname, Singapore Monetary Authority, Turkey Central Bank, European Central Bank and Hungary Central Bank, totaling RMB 683 billion yuan. In October, the Republic of Korea and China signed a deal to extend the bilateral currency swap agreement and expand the size to USD 59 billion.
IMF also recognizes the RMB as a freely usable currency in 2016 due to developments of a role in creating conditions that prodded the and include it as the fifth currency along with the dollar, the euro, the yen, and the pound, in the Special Drawing Right (SDR) basket. It was also a source of support for developing countries, including strategically-placed, foreign exchange-starved neighbors like Sri Lanka and Pakistan.

China maintains good relations with South Asian countries and continues its trade strategy. China has been conducting small to large investment activities with Bangladesh, Pakistan, Nepal, Bhutan, India, Vietnam and Myanmar. China has long pursued a policy with South Asian countries. China easily develops good relations with any country and those relations are long lasting. China puts its own business interests first. On the other hand, Bangladesh is in a strategic position of geopolitics.

The bilateral economic and trade cooperation between China and Bangladesh has witnessed all-round development with effective cooperation in all areas and brought tangible benefits to both peoples. The two countries are moving forward economically, socially and culturally through multidimensional cooperation. Today, China is Bangladesh's largest trading partner.  Bangladesh, China, India and Myanmar (BCIM) economic cooperation and compares it with the alternative option of expanding South Asian Free Trade Area (SAFTA) with China and Myanmar. 

The annual net inflow of investment from China to Bangladesh ranked first among all the FDI sources of Bangladesh. And Bangladesh has been one of the countries utilising the largest amount of Chinese concessional loans. A number of major infrastructure projects have been implemented by Chinese enterprises in the fields of transportation, energy, power and communications in Bangladesh. For the three consecutive fiscal years since FY2018, the net inflow of investment from China to Bangladesh ranked first among all the FDI sources of Bangladesh. Apart from light industry, garments, shoes and infrastructure such as power plants and highways, Chinese investors have also invested in Bangladesh's finance, mobile payment, and automotive industries. In the future, the strong momentum of China's investment to Bangladesh will continue.

China has granted preferential tax rate of zero to 97% of tax items originating in Bangladesh from July 1, 2020, which will help alleviate the trade imbalance between two countries. Both the counties sees the high growth potential of Bangladesh in the future. It is for sure that if the bilateral currency cooperation between China and Bangladesh is further deepened in the future, the economic and trade exchanges between our two countries will embrace new opportunities from the following perspectives:

While China is steadily pushing forward monetary cooperation with other central banks and monetary authorities globally, optimizing the framework of currency cooperation, Bangladesh may evaluate the possibility of signing a bilateral currency exchange agreement with China and make the bilateral currency cooperation play a more active role in facilitating bilateral trade and investment.

The writer is a legal economist. He can be contacted at [email protected]