China and Pakistan promote local currency trade, in fact, emerging market countries are rubbing their hands

Malaysian Prime Minister Anwar, who has just finished his visit to China, said in the Malaysian parliament on April 4: "There is no reason for Malaysia to continue to rely on the US dollar." He made such a statement not on a whim.

He revealed that Bank Negara Malaysia is already in discussions with the Chinese side to directly use the Malaysian ringgit and renminbi for trade settlement. During his visit to China, Anwar also attended the Boao Forum for Asia Annual Conference 2023, during which he also proposed the long-awaited idea of the Asian Monetary Fund.

In fact, at present, emerging market countries from Southeast Asia to the Middle East to Latin America are striving to promote currency diversification and enhance local currency trade settlement channels. Among them, China and Brazil recently signed a memorandum of cooperation on the establishment of RMB clearing arrangements in Brazil, which triggered extensive discussions.

Yue Yunxia, director of the Economic Research Office of the Institute of Latin American Studies of the Chinese Academy of Social Sciences, told First Financial Reporter that the signing of the above-mentioned memorandum of cooperation will definitely promote the internationalization of the RMB. She further said that the settlement function is one of the main manifestations of currency internationalization, and this agreement marks one of the substantial progress of RMB internationalization.

ASEAN strengthens the use of local currencies

Anwar, who is also Malaysia's prime minister and finance minister, has long thought about the Asian Monetary Fund proposal.

He said on the 4th that when he first served as Malaysia's finance minister in the 90s of last century, he had proposed the idea of the "Asian Monetary Fund", but the US dollar was still very strong at that time, so this idea did not follow.

"But now with the economic power of China, Japan and other countries, I think this should be discussed." At least consider the 'Asian Monetary Fund' first, and then discuss the settlement (international trade) in the local currency of each country. Anwar said.

Anwar's initiative has received more support than it did more than it was more than 20 years ago. At the ASEAN Finance Ministers and Central Bank Governors' Meeting in late March, the top agenda was to discuss how to reduce the dependence on foreign currencies such as the US dollar for financial transactions and shift to local currency settlements.

By the end of the meeting on March 3, ASEAN member states agreed to strengthen the use of local currencies in the region and reduce dependence on current major international currencies for cross-border trade and investment.

This is also a further extension of ASEAN's Framework Agreement on Bilateral Local Currency Settlement (LCS). Since 2016, ASEAN countries have begun to explore local currency settlement pilots. Indonesia, Malaysia, Thailand and the Philippines signed LCS.

The latest study shows that since Thailand and Malaysia signed the LCS in 2016, Thailand's share of exports denominated in Thai baht has increased significantly. Also under the LCS framework, the share of trade between Malaysia and Indonesia settled in local currency increased from 2018.1% in 4 to 2020.4% in 1.

In addition to the promotion of LCS within the ASEAN region, Indonesia, as one of the founders of LCS, has been actively promoting LCS out of ASEAN. In this context, China and Indonesia also officially launched their local currency settlement mechanism in September 2021. This move will help reduce the transaction costs of enterprises on both sides, expand the use of local currencies in economic and trade exchanges between the two countries, and release the potential of trade, investment and financial markets between the two sides.

David E. Sumual, chief economist of Central Asia Bank, Indonesia's largest private bank, said a few days ago that the trend of "de-dollarization" has gradually emerged in many regions. ASEAN plans to strengthen the use of local currencies, reduce dependence on some foreign currencies and payment systems, and better withstand the negative impact of external turbulence on the regional economy.

In mid-March, Indonesian President Joko Widodo also said that it should reduce dependence on foreign payment systems and use more domestic bank credit cards to avoid geopolitical impact on transactions.

Today, Sumouar said, there have been fundamental changes in global trade and investment, but the architecture of the international monetary system centered on the dollar has not changed. The current international monetary system does not reflect market changes and demand. Not only in Southeast Asia, but also in Latin America, the Middle East and other regions, the trend of currency diversification is gradually emerging.

He said that ASEAN's promotion of the use of local currencies can not only support the stable development of cross-border trade and investment in the region, but also reduce external shocks to the regional economy. Clearing transactions in local currencies helps reduce dependence on major currencies such as the US dollar.

The use of the US dollar in ASEAN countries has always been high. According to a report by the Asian Development Bank, from 2015 to 2020, 80%~90% of exports of most ASEAN countries were settled through US dollars. This is mainly due to the high liquidity and stability of the US dollar, and its lower transaction costs when used as an intermediate currency.

Exploration of the BRICS countries

This summer, the 1th BRICS Summit will be held in South Africa. South African Foreign Minister Pandore said in January that the BRICS countries wanted to find a way to bypass the dollar and create a fairer payment system that does not favor Western countries.

BRICS is an important cooperation mechanism between emerging markets and developing countries. Recently, more media reported that at this year's BRICS summit, the mechanism for trade settlement between member countries in local currencies may be discussed. In fact, within the BRICS countries, a number of bilateral local currency settlement channels have been established.

On February 2, People's Bank of China announced the signing of a memorandum of cooperation with the Central Bank of Brazil to establish a RMB clearing arrangement in Brazil. The establishment of the RMB clearing arrangement in Brazil will facilitate the use of RMB by Chinese and Brazilian enterprises and financial institutions for cross-border transactions, and further promote bilateral trade and investment facilitation.

In this regard, Foreign Ministry spokesman Mao Ning said at a regular press conference on March 3 that China and Brazil signed a memorandum of cooperation on the establishment of RMB clearing arrangements in Brazil earlier this year, and the establishment of RMB settlement arrangements in Brazil will help enterprises and financial institutions in China and Brazil use RMB for cross-border transactions and promote bilateral trade and investment facilitation.

At the same time, Brazil is also promoting regional currency integration. In January, Brazil and Argentina, South America's two largest economies, announced that they were preparing to create a common currency, the sur. The move will boost trade in South America and reduce dependence on the U.S. dollar. Previously, the US dollar accounted for as much as 1% of international trade in South America.

At the same time, India and Russia, which are also BRICS countries, also established a local currency trading mechanism of the rupee and ruble in 2022. As early as after the outbreak of the Russian-Ukrainian conflict in February 2022, India has actually begun to "plan ahead", seeking to establish a rupee payment mechanism to handle future trade with Russia and mitigate the adverse impact of the escalating Western sanctions against Russia.

On July 7 last year, the Reserve Bank of India, the central bank of India, introduced the rupee settlement mechanism for international trade, which came into effect immediately. While the RBI said it was to boost global trade, boost interest in the Indian rupee in the global trading community and boost India's exports. But the move is seen as helping India trade with Russia.

Liu Zongyi, secretary-general of the China and South Asia Research Center of the Shanghai Institute of International Studies, told the first financial reporter that while India is currently deepening relations with the United States, it hopes to attract economic chains and industrial chains to transfer to India, but at the same time is not willing to become a "small partner" in the US global economic system, and economic cooperation with Russia will help India achieve economic independence.

Saudi Arabia, as a major representative of the Middle East economy, has repeatedly expressed its desire to join the BRICS countries last year. Saudi Finance Minister Mohammed Jadan said in January that Saudi Arabia was willing to consider settling oil trade in currencies other than the dollar, the first time in 1 years that Saudi Arabia has shown openness to trading currencies other than the dollar.

As of the fourth quarter of 2022, the dollar's share of global foreign exchange reserves has fallen to 58.4%, the lowest level since data began in 1995, according to the International Monetary Fund (IMF).

Under geopolitical changes, cracks have appeared in the global monetary system centered on the US dollar, and the single currency system centered on the US dollar is transforming into a multipolar system. However, the currency diversification currently promoted by major emerging market countries is not to completely "de-dollarize", they prefer to improve and upgrade the existing system.

The US dollar still plays a dominant role in global markets. The U.S. dollar ranks first in global trade settlements, central banks' foreign exchange reserves, global debt denominations, and global capital flows. According to data released by the Central Bank of Brazil on March 3, the US dollar accounts for 31.80% of Brazil's international reserves, still occupying an absolute dominant position.

Analysts believe that China's sustained and stable economic growth in recent years has laid a solid foundation for the internationalization of the RMB. Over the past decade, China has been an important engine of global economic growth. Secondly, the RMB exchange rate is stable, and its safe-haven nature as an international currency has become increasingly prominent. Since 2022, affected by factors such as the tightening of the Federal Reserve's monetary policy and the ongoing conflict between Russia and Ukraine, the exchange rate of the euro, the yen and other currencies against the US dollar has fallen sharply, while the performance of the RMB has been relatively firm, which has become more attractive to investors.

For Chinese foreign traders, the most direct and important benefit of using cross-border RMB to receive money is to avoid exchange rate risks. In the current environment of widespread RMB appreciation, cross-border RMB hedging has become more important.

Source: Yicai Author: Qian Xiaoyan