State Bank of Pakistan (SBP) has allowed traders of Pakistan and China to trade different goods and services through Chinese Currency, Yuan. Both public and private sector enterprises (i.e. both Pakistanis and Chinese) are free to choose CNY for bilateral Trade and Investment activities.
The central bank already provided various options to local and Chinese traders earlier but it has reiterated available options to traders of both countries. This is being done to facilitate them as the trade volume and value increases at a substantial level for building up China Pakistan Economic Corridor (CPEC)
SBP, in the capacity of the policy maker of financial & currency markets, has taken comprehensive policy related measures to ensure that imports, exports and financing transactions can be denominated in CNY, the notification issued stated.
SBP had taken a series of steps to promote the use of CNY in Pakistan for bilateral trade and investment with China.
As per current foreign exchange regulations, Chinese Yuan (CNY) is an approved foreign currency for denominating foreign currency transactions in Pakistan. CNY is at par with other international currencies such as USD, Euro and JPY etc.
It may be mentioned here that Pakistan signed Currency Swap Agreement (CSA) with People’s Bank of China (PBoC) in 2011-12.
SBP has already put in place the required regulatory framework which facilitates use of CNY in trade and investment transactions such as opening of L/Cs and availing financing facilities in CNY.
For onward lending the proceeds of CSA, SBP has put in place the loan mechanism for banks to get the CNY financing from SBP for onward lending to importers and exporters having underlying trade transactions denominated in CNY.
It allowed banks to accept CNY deposits and give CNY Trade loans. Apart from it, several banks in Pakistan maintain onshore CNY nostro accounts.
Industrial and Commercial Bank of China Limited (ICBC) Pakistan has been allowed to establish a local CNY settlement and clearing setup in Pakistan enabling it to open CNY accounts of the banks operating in Pakistan and to facilitate settlement of CNY based transactions such as remittance to/from China.
With the opening of Bank of China in Pakistan, the access to onshore Chinese markets will strengthen further.
Considering the recent local and global economic developments, particularly with the growing size of trade and investment with China under CPEC, SBP foresees that CNY denominated trade with China will increase significantly, going forward; and will yield long term benefits for both the countries.
Economists believe the utility of this facility by traders of the two countries will not only boost the economic ties of the two countries but it will extremely beneficial for Pakistan’s especially when it comes to containing its Current Account Deficit.
They were of the view that the foreign exchange reserves of Dollar could be saved through using Chinese currency for trading goods and services with China, which is also a big importing country for Pakistan.
Also, the inflows of Chinese currency could be increased when investments by public and private sector of China is increased in Yuan. This will built up reserves of the Chinese currency in Pakistan, making payment against imports from China more viable.