As the Covid-19 is spreading quickly around the world, its effects on the world economy including that of Pakistan are profound, complex and far-reaching. In order to mitigate the adverse impacts and rescue the nosediving economic growth, almost all countries across the world have turned to the old and traditional prescription of quantitative easing (QE) to generate growth and create employment. QE may be the short term solution, but it will bring lots of uncertainties and turbulence in a long run, especially the USD based trade and investment etc. will suffer hugely. One of the most effective ways to deal with the situation is seizing opportunities and taking full advantage of turning to and utilizing RMB.
RMB is increasingly used in the international market. At present, Chinese Yuan (CNY), also known as renminbi (RMB) is widely adopted in the international market. 38 countries or regions have signed Currency Swap Agreements (CSA) with China with a total value of 3.67 trillion yuan. Likewise, more than 60 central banks or monetary authorities have brought RMB into their foreign exchange reserves. Over 240 countries and regions with 2,300 financial institutions conducted RMB cross-border transactions. In 2019, the trans-border receipts and payments on RMB amounted to 19.7 trillion yuan, ranking 6th in the world with a 1.94% share in terms of international payments. Many countries, have utilized CSA to effectively cope with capital markets volatility and balance international payments. Since 2018,RMBhas been embracing much brighter prospects with the advent of RMB denominated futures for gold, crude oil and iron ore.
As all-weather strategic cooperative partners, China and Pakistan enjoy close economic and trade ties and the utilization of RMB in Pakistan has been on the rise rapidly in recent years. The two countries have signed and renewed CSA several times since 2011,with facility amount of 351 billion Pakistan rupees/20 billion Chinese yuan. On March 20, 2020, the Pakistan side proposed to expand the scale of CSA to 40 billion yuan. In addition, the State Bank of Pakistan(SBP) has introduced a series of policies to encourage the use of RMB in bilateral trade and investment, including: Banks are allowed to accept RMB deposits and issue RMB trade loans; Enterprises are allowed to conduct trade, financing and investment in CNY; streamline the regulatory framework and loan mechanism, including opening of L/Cs and using financing instruments in CNY; authorize Chinese banks to open branches and set up RMB clearing and settlement mechanisms in Pakistan in order to provide RMB full-range services. Thanks to the importance attached and effective measures taken by both sides, the proportion of RMB settlement in economic and trade activities between China and Pakistan keeps increasing and the scale of RMB investment is getting larger.
The significance of expanding use of RMB in economic and trade cooperation between China and Pakistan are: firstly, with the COVID-19 spreading around the world, the global financial markets are falling into a mess of unprecedented magnitude. In this context, RMB, as a global safe-haven currency, is becoming more and more popular, since using RMB can avoid excessive dependence on the US dollar and mitigate the deterioration of Pakistan's US dollar reserves. Secondly, using RMB in cross-border trade can achieve direct settlement between CNY and Pakistan Rupees, resist the turbulence and disruption by exponential QEs across the world and reduce exchange costs as well as rate risks. Thirdly, using RMB could attract more Chinese investment. China is one of the world's leading foreign investors and the largest source of investment for Pakistan, especially from the private sector. If more preferential policies could be introduced to use RMB in the free zones, it will positively push forward the implementation of investment projects in a faster manner.
Now, it's the high time to actively expand the use of RMB in Pakistan and strengthen the bilateral economic and trade cooperation. To begin with, the RMB clearing system has provided a strong guarantee for Pakistani enterprises to enter into the international markets. At present, with the international standards, the China International Payment System (CIPS) covers all participants from over 90 countries and regions around the world. East and Southeast Asian countries account for about 40% of Pakistan's total imports and exports. In these regions, RMB is highly acceptable and widely used. When cross-border transactions are conducted in this region, denomination and settlement through the CIPS system in CNY provides Pakistani enterprises with more choices in various markets. In contrast to the close bilateral economic and trade relations, currently only 10% of the transactions between China and Pakistan are settled in CNY because: a considerable number of enterprises have little knowledge about the usage of RMB for trading and investment; the traditional mode of thinking about exchanging to RMB might make it difficult to take the "first step". Moreover, the foreign exchange rules in Pakistan tend to be strict. Financial assets and liabilities denominated in RMB are accounting for a relatively small portion. Likewise, it's hard to keep foreign currency and lock forward foreign rate. Based on the above reality, all sides including governments, financial institutions and enterprises in both countries shall work together to promote the greater use of RMB in the following aspects. Firstly, making further publicity of utilizing RMB and raising the awareness of financial institutions, enterprise, customers and the public about the merits of the RMB payment and settlement and streamline the financial systems. Secondly, SBP shall draw up special foreign currency policies different from the US dollar, such as allowing enterprises to keep RMB without approval from SBP in Pakistan. Thirdly, setting Gwadar free zone and other special economic zones as the pilot areas, allowing enterprises to keep RMB in their account and settle on RMB in this zones. SBP shall make breakthrough in granting local banks to issue mid and long term RMB loans and exploring the feasibility of issuing short-term RMB loans.