Home ›› 19 Apr 2023 ›› Editorial
China emerging as a major economic power, being the second largest economy after the United States. It has become a country of tremendous influence in the global economy and financial markets. It is no secret that China would like to con-vert the renminbi into an international currency and move away from the global dominance of the US dollar. For many years the US $ was the dominant reserve currency in international transactions. Its position came under threat only with the introduction of Euro by the European Union in late 90's, but still US$ holds the 1st place in the settlement of interna-tional transactions. Perhaps, the position of US$ as the settlement currency will remain at the top for quite a long time. Many, however, think that its dominance will be squeezed out over time.
The central banks around the world are increasing yuan holdings in their reserves as China, as its economic might grows, wants its currency to replace the US dollar as global currency and the Bangladesh Bank is following suit. Bangladesh al-lowed its banks to maintain accounts in Chinese yuan for overseas transactions to reduce dependency on the US dollar. China already has a Cross-Border Inter-Bank Payments System (CIPS) with the Chinese yuan as the trading currency was also a factor in Bangladesh's decision. Earlier, the government had made Chinese yuan as a convertible currency in March 2014.
The Bangladesh Bank in March 2023 allowed local businesses to maintain export retention quota (ERQ) in the Chinese yuan, a move that is expected to boost exports to China and encourage investment from the world's second-largest economy.
Bangladeshi exporters were also allowed to hold yuan in their export retention quota (ERQ) for trade settlement in Chinese currency. Presently, exporters can maintain ERQ in the US dollar, euro, Japanese yen, and pound sterling. Now ERQ is al-lowed in the Chinese yuan.
The ERQ is determined by the Bangladesh Bank and varies depending on the type of products and value addition. For exam-ple, exporters of raw jute and vegetable can keep up to 60% of their export proceeds in ERQ as their value addition is 100%. On the other hand, readymade garment exporters can keep only 15% in ERQ accounts as their value addition is low.
These developments came after China offered a currency swap agreement between the Bangladesh Bank and the People's Bank of China, its central bank, for using both renminbi and taka as currencies of pricing and settlement in bilateral trade in August last year.
In October 2016, the renminbi became part of the basket of currencies underpinning the International Monetary Fund's (IMF) reserve asset, special drawing rights (SDR), joining an exclusive club alongside the dollar, the euro, the yen, and the British pound. The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves.
The share of yuan has been growing steadily in the country's foreign exchange reserve after the Chinese currency was in-cluded in the Special Drawing Rights (SDR) currency basket of the International Monetary Fund (IMF) in 2016. At present, the Chinese yuan ranks third in terms of weight in the SDR basket, after the US dollar and the euro.
The ERQ is determined by the Bangladesh Bank and varies depending on the type of products and value addition. For exam-ple, exporters of raw jute and vegetable can keep up to 60% of their export proceeds in ERQ as their value addition is 100%. On the other hand, readymade garment exporters can keep only 15% in ERQ accounts as their value addition is low.
These developments came after China offered a currency swap agreement between the Bangladesh Bank and the People's Bank of China, its central bank, for using both renminbi and taka as currencies of pricing and settlement in bilateral trade in August last year. At the moment, Euro is in number two position, being used for up to 30 per cent of international transac-tions. But for Bangladesh, Yuan is more important than some other reserve currencies. China is the number one investing country in Bangladesh, and also its number one trading partner.
Another consensus built in the Shanghai Cooperation Organization (SCO) – which has China as its members – for increasing the use of national currencies for trade among the member countries at its leadership summit in the Uzbek city of Samar-kand in 2022. Bangladesh is not yet an SCO member but has applied for observer status in the Eurasian organization. With a renewed focus on international trading in national currencies, the SCO can create a potential market for other countries to trade with SCO member countries in their currencies or a mutually-accepted single currency such as the Chinese yuan.
According to businesses and bankers, this latest policy change could have several benefits for Bangladesh. Firstly, it could increase the competitiveness of Bangladeshi products in China by eliminating the need for Chinese importers to convert the yuan to other currencies. Also, it could improve market access, diversify Bangladesh's foreign currency reserves, and re-duce its dependence on the US dollar. The move may also attract Chinese investments and help to strengthen diplomatic relations by facilitating trade and increasing economic interdependence between the two countries.
In a major policy decision, Bangladesh is set to make loan repayment for the Rooppur Nuclear Power Plant project to Rus-sia in yuan as US sanctions on Russian banks have forced the two nations to settle payments using the Chinese currency, moving away from the US dollar. Under the new arrangement, Bangladesh will make payment settlements with Russia through a Chinese bank, and Russian beneficiaries will receive payments using China's Cross-Border Interbank Payment Sys-tem (CIPS). Bangladeshi banks will make payments only in yuan to any Chinese bank and the Russian beneficiary will receive the payment and convert it to ruble at their own cost.
In 2020, Moscow offered Dhaka a bilateral currency swap arrangement for trade settlement, but the move was put on the back burner following US sanctions. Russia then offered Bangladesh Bank to join the SPFS, a payment channel developed by Moscow, but Bangladeshi banks were unwilling to join.
The value of a currency is not only determined by its purchasing power, but also by the confidence of its users. Internation-ally, the US$ will have more users than Chinese Yuan for many years to come. Those who have the freedom of use like the individual international investors, will prefer US$ over Yuan or other reserve currencies for the very fact that they have more confidence in US$ than on other competing reserve currencies. China has achieved notable progress towards making the renminbi a global reserve currency, it is still far from reaching its goal.
The writer is non-Government Adviser, Bangladesh Competition Commission. He can be contacted at mssid-diqui2035@gmail.com
