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Pak China trade set to replace dollar with yuan

dollar with yuan
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News Analysis |

Starting the year on an optimistic note, the State Bank of Pakistan (SBP) announced that all arrangements for using Chinese yuan for bilateral trade as well as financing investment activity between Pakistan and China are already in place.

On December 19th, 2017, Minister for Planning and Development Ahsan Iqbal had said that the GOP was considering a Chinese proposal to use renminbi (RMB or yuan) instead of the US dollar for payments in all bilateral trade between China and Pakistan. The decision was taken after rejecting a Chinese proposal to allow yuan as legal tender in Gwadar, Balochistan.

When asked, the SBP spokesman said the statement on yuan was issued due to many queries from media about the use of the currency for bilateral trade.

“The SBP, in the capacity of the policy maker of financial and currency markets, has taken comprehensive policy related measures to ensure that imports, exports and financing transactions can be denominated in yuan,” said a statement issued by the SBP. It went on to say that both public and private sector enterprises (both Pakistanis and Chinese) are free to choose yuan for bilateral trade and investment activities.

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The RMB is an approved currency for denominating foreign currency transactions in Pakistan. 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 financing facilities in yuan. In terms of regulations in Pakistan, yuan is on a par with other international currencies such as dollar, euro and Japanese yen, etc.

 In the years following CPEC and integration of Chinese businesses into the Pakistani commerce spectrum, there have been vast efforts to explore trade opportunities and to encourage business strategists to devise plans to enhance trade relations between the two companies.

The bank foresees that yuan denominated trade with China will increase significantly and will yield long term benefits for both the countries.

Earlier this week, a delegation of Shannxi Province of China visited Islamabad Chamber of Commerce and Industry (ICCI) to explore business matchmakings with Pakistani counterparts. The delegation was representing various companies of Shaanxi province including Shaanxi Pharmaceutical Holdings Group Co., Ltd, Shaanxi Coal and Chemical Industry Group Co Ltd, Shaanxi Automobile Group Co.l Ltd and others.

The delegation members said that this was their first visit to Pakistan to study the Pakistani market. They showed interest for business matchmakings and joint ventures with Pakistani counterparts in pharmaceuticals, chemicals, automobiles, engineering, communication and solar energy sectors.

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The delegation members stressed for frequent interaction between the private sectors of China and Pakistan to understand each other and establish business collaborations. The representatives of Shaanxi Pharmaceuticals Group said that their company was exporting pharma products to over 200 countries and it wanted to explore business prospects in Pakistan.

The representatives of automobile group said they were already supplying heavy trucks to Pakistan and were looking for partners in Pakistan to supply more trucks. The delegation members also invited ICCI members to visit Shaanxi Province to explore business collaborations.

Industrial and Commercial Bank of China Ltd (ICBC) Pakistan has been allowed to establish a local yuan settlement and clearing setup in Pakistan enabling it to open yuan

In FY17, Pakistan exported goods and services worth $1.62 billion while the imports from China were $10.57bn reflecting a great imbalance. The two countries have yet not finalized a free trade agreement (FTA). The FTA may benefit with exports from Pakistan, as the country critically needs to improve its exports due to huge trade deficits.

After signing a Currency Swap Agreement (CSA) with People’s Bank of China (PBoC) in 2012, the SBP had taken a series of steps to promote use of yuan in Pakistan for bilateral trade and investment with China. The central bank has allowed banks to accept deposits and give trade loans in yuan.

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For onward lending the proceeds of CSA, the SBP has put in place the loan mechanism for banks to get the yuan financing from the SBP for onward lending to importers and exporters having underlying trade transactions denominated in the Chinese currency.

In 2012, the SBP had issued a circular that said that the authorised dealers may open foreign currency accounts and extend trade loans under FE-25 Scheme in US dollar, pound sterling, euro, Japanese yen, Canadian dollar, UAE dirham, Saudi riyal, Chinese yuan, Swiss franc and Turkish lira.

Industrial and Commercial Bank of China Ltd (ICBC) Pakistan has been allowed to establish a local yuan settlement and clearing setup in Pakistan enabling it to open yuan accounts of the Chinese banks operating in Pakistan and to facilitate settlement of yuan-based transactions such as remittance to/from China.

The delegation members stressed for frequent interaction between the private sectors of China and Pakistan to understand each other and establish business collaborations.

“With the opening of Bank of China in Pakistan, the access to onshore Chinese markets will strengthen further. Apart from the above, several banks in Pakistan maintain onshore yuan nostro accounts,” said the SBP.

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The SBP said considering the recent local and global economic developments, particularly with the growing size of trade and investment with China under CPEC, the bank foresees that yuan denominated trade with China will increase significantly and will yield long term benefits for both the countries.

When asked, the SBP spokesman said the statement on yuan was issued due to many queries from media about the use of the currency for bilateral trade. He said it seemed there was confusion about the use of yuan for bilateral trade, which was clarified with this detailed statement.


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