As businesses in Bangladesh have not yet effectively utilised trade in the Chinese Yuan despite having permission amid the ongoing dollar crisis, accelerating this initiative is going to be a key focus during Prime Minister Sheikh Hasina’s visit to China from July 8-11.
Sources from both the commerce and foreign affairs ministries have confirmed that discussions regarding the matter have already taken place between Bangladesh and China.
In September 2022, the government issued a circular through Bangladesh Bank allowing authorised banks to open accounts in Chinese Yuan for letters of credit (LC) and transactions with the foreign branches of local businesses.
Previously, in March 2014, the government had issued a gazette notification declaring the Yuan as a convertible currency. However, many banks are still not using the Yuan for settling international trades or foreign transactions.
Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Executive President Mohammad Hatem told The Business Post, “China is set to lead future global trade and is rapidly becoming the business hub of tomorrow. Therefore, we in the business community are pleased that trade in Chinese Yuan will be discussed as one of the key issues during the prime minister’s visit to China.”
Mentioning that transactions in Chinese Yuan are still happening but only to a limited extent, similar to transactions with Russia, he acknowledged that there is still a significant trade imbalance between Bangladesh and China.
The BKMEA executive president expressed hope that the prime minister’s visit to China would boost Yuan transactions.
Trade relationship with China
China accounts for 25 per cent of Bangladesh's total imports, while only 1.22 per cent of Bangladesh's exports go to China. In the fiscal year 2012-13, trade with China amounted to $6.77 billion. Nearly a decade later, in the fiscal year 2021-22, bilateral trade had tripled to $20.03 billion.
On average, Bangladesh conducts just under $19 billion worth of trade with China annually, with about $18 billion being imports from China and roughly $1 billion being exports to China.
Addressing economic pressures
Since the post-Covid period, Bangladesh's reserves have been continuously declining. Complications in shipments have led to a 10 per cent drop in garment exports and high inflation rates have increased economic pressure.
Last year, the International Monetary Fund (IMF) approved a $4.7 billion loan for Bangladesh, but the export sector remains under strain.
Due to the continuous decline in reserves, Fitch Ratings downgraded Bangladesh's credit score last May. To curb the depreciation of the Taka, the dollar exchange rate has been set using a crawling peg system. Bangladesh Bank officials believe this method has temporarily reduced market volatility. They also indicated that a market-based dollar pricing could be considered once reserves begin to rise and the balance of payments becomes positive.
Loan request from China
In a recent interview with Bloomberg, Bangladesh Bank Governor Abdur Rouf Talukder said that Bangladesh has requested a loan of 36 billion Yuan, equivalent to $5 billion, from China to address the reserve crisis and cover import costs.
The loan, which will be taken in Chinese Yuan, will not only help address the foreign exchange shortage but also cover the expenses of imports from China. This loan will also be discussed during Prime Minister Sheikh Hasina's visit to Beijing, he said.
Meanwhile, Chinese Ambassador to Bangladesh Yao Wen hinted that Bangladesh has sought China's assistance to tackle the reserve crisis. “This is the first time Bangladesh has sought help from another country to address a reserve crisis. Positive feedback on this request might be received during the Prime Minister's visit to China,” the Chinese envoy said.
Technical discussions regarding the loan have taken place between the two countries. Loans in Chinese Yuan have lower interest rates, known as the Shanghai Interbank Offered Rate (Shibor), which is much lower than the Secured Overnight Financing Rate (SOFR) for dollar loans.
Proposal for local currency trade
State Minister for Commerce Ahasanul Islam Titu said that a proposal has been made to use local currencies, Taka and Yuan, alongside the US dollar for trade transactions between Bangladesh and China.
He mentioned that using Taka and Yuan for trade with China could relieve some of the pressure from the ongoing dollar shortage and facilitate the expansion of regional trade.
Since the Chinese Yuan is one of the five high-value currencies recognised by the IMF, transactions in Yuan have long been possible. However, if the new proposal is implemented, it would allow for transactions in both Taka and Yuan.
On July 11, a system for transactions in Indian Rupees was officially launched. Despite the introduction of this system six months ago, only a few letters of credit (LCs) of nominal value have been issued for imports and exports.
Bangladesh China Chamber of Commerce and Industry (BCCCI) Secretary General Al Mamun Mridha said that the trade system with India in Indian Rupees did not gain popularity due to the lack of international acceptance of the Rupee, making businesses hesitant.
“However, this issue is not expected with the Yuan. Many countries are now trading in Yuan, and it is internationally recognised, reducing any associated risks,” he said.
“Additionally, businesses have long advocated for trade in Yuan to ease the pressure on the dollar and simplify trade between the two countries,” he added.
