SBP allows Bank of China to settle transactions in yuan

KARACHI: The central bank on Wednesday granted Bank of China permission to establish yuan settlement and clearing mechanism in a major step to encourage trade with Chinese currency and eventually in the respective local currencies.

This move could further bolster the size of trade and investment with China under China-Pakistan Economic Corridor (CPEC).

“In order to further strengthen the trade channels and remittance flows in Chinese yuan, SBP has now allowed Bank of China (BoC) Pakistan to establish a local yuan settlement and clearing setup in Pakistan,” the State Bank of Pakistan (SBP) said in a statement.

“BoC can open yuan accounts of the banks operating in Pakistan, to facilitate settlement of yuan-based transactions such as remittance to/from China. BoC can also provide yuan liquidity to the interbank market for the settlement of yuan-based transactions.”

The SBP expects this settlement and clearing mechanism to reduce costs and increase efficiency for the local banking system in transacting in Chinese yuan, enhance market liquidity and facilitate settlement of growing trade and investment transactions between China and Pakistan in the said currency.

“Keeping in view the recent local and global economic developments, SBP expects this initiative to yield long-term benefits to China-Pakistan relationship in general, and Pakistan’s economy and banking system in particular,” it said.

SBP signed a currency swap agreement with the People’s Bank of China with the objective of promoting bilateral trade and financing direct investment between the two countries in the respective local currencies.

It is worth noting that back in 2015 SBP had allowed Industrial and Commercial Bank of China Limited (ICBC) Pakistan to offer similar services.

“This is a good thing that the central bank has done. This is going to reduce pressure on demand for dollars because trade deficit with China is contributing significantly to widening of the current account deficit,” said Dr Ashfaque H Khan, dean at NUST School of Social Sciences.

“With this measure, it will help reduce current account deficit as well which will further reduce our financing requirement, going forward.”

The SBP has continuously been taking policy measures to ensure that imports, exports and financing transactions with China can be denominated in yuan.

A currency swap agreement between the two countries was signed in 2011. The swap arrangement became operational in 2013 with a size of Chinese yuan 10 billion and Rs140 billion ($1.5 billion).

The country’s bilateral trade deficit with China widened to $12 billion in the fiscal year 2016/17 from $4 billion in 2012/13.

Pakistan's imports from China jumped to $14.13 billion in FY17 against $12.11 billion in the previous year. However, the exports stood at $1.5 billion in FY17, compared with $1.7 billion in FY16.