Behind the flurry of news on PM Gilanis recent visit to China was one rather interesting but widely missed story: that both countries have agreed in principle to price their bilateral trade in Chinese yuan - a move that might bring diplomatic pressures from Uncle Sam.
But keeping the politics aside, and knowing that things haven been finalised as yet, one can safely say the agreement bodes well for Pakistans economy. The agreement, albeit verbal at this point, between the top officials of Pakistan and China involves replacing US dollar with yuan as the currency of trade denomination. Doing so looks like the right step in the right direction, at just about the right time.
After all, seven other regional countries now trade with China in yuan (RMB) instead of the greenback, amid ever increasing talks of dollar being run over or at least sidelined by the euro and other major currencies. On the face of it, this whole idea of pricing trade in RMB-PKR makes little sense, as denominating trade in US dollars between FY04-FY08 had actually cushioned Pakistan against strengthening value of yuan, which gained 39 percent against the rupee during the period.
But here in lies the catch: as soon as the management of USD-PKR float was stopped in FY09, the rupee was hit by a double whammy, a) the continuing strengthening of yuan versus rupee and the US dollar and b) sharp weakening of rupee against the dollar. This changing dynamic made Chinese imports rather expensive in dollar terms. Chinese goods are Pakistans second biggest import after Saudi Arabia. China has about 10 percent share in Pakistans imports making it a vital trade partner.
And of little surprise, trade balance between the two countries is heavily tilted in Chinas favour, with a ratio of 4:1 in dollar terms. With Chinas slow but steady emergence as the next big thing in the global economy coupled with global recession badly hurting the US dollar, the yuan-dollar parity has moved heavily in Chinas favour. The greenback depreciated by 13 percent against the yuan in just last one year.
In the meanwhile, the rupee saw a free-fall against the dollar as the artificial lid could not be kept in place any further amid worsening economic indicators. The currency fell 30 percent against the dollar in FY09 alone while falling 15 percent against the Yuan. This means that in a persistently weak-dollar world amid rupees fragility against the greenback, pricing trade in yuan makes good sense.
The move will not only help Pakistan lower its transaction costs but will also help avoid two exchange rate risks for one, by replacing the risks of USD-RMB and USD-PKR, with RMB-PKR. It would also help Pakistan better manage its liquidity problem and safeguard its dollar reserves. Although, the agreement is yet to be inked by the central bank chiefs of both countries, it may well be of symbolic significance given the changing power hubs in the global economy.
And while the impact in numbers isn of great significance at this point in time, it will be in the foreseeable future, considering that Pakistan is already eying the membership of Shanghai Co-operation Organisation (SCO) to boost bilateral trade with China, which it expects to touch $15 billion in the next three years.
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