BEIJING : China and Pakistan have made a great headway giving bankingsupport to their growing socio-economic partnership, says a reportpublished by the Middle East North Africa Financial Network (MENAFN).
After establishing its first branch in Karachi last November, the Bank ofChina formally launched a clearing and settlement mechanism of Chinese yuan.
Having received clearance from the State Bank of Pakistan (SBP) fordenominating foreign-currency transactions, one of the main targets of theLong-Term Plan of the China-Pakistan Economic Corridor for 2017-30 has beenachieved,
According to the report, giving the yuan equal status to the US dollar inPakistan strengthens the financial bonds between these “all-weatherstrategic partners.”
Up to now, Pakistan’s foreign-exchange regime conducted international tradeonly in dollars. Working on changing over to bilateral trade in yuan withChina, the SBP has been gradually enforcing and organizing the switch-over.
Expecting the new mechanism to cut costs greatly and speed up efficiencyfor yuan transactions and enhance market liquidity, the SBP believes thisarrangement will elevate the trade relationship between Pakistan and China.
Back in 2012, the first currency swap agreement was signed by the SBP withthe People’s Bank of China, and this was followed up by allowing banks togive trade loans in yuan and also accept deposits in the Chinese currency.
Devising a loan mechanism for banks to get yuan financing, the SBPinitially allowed ICBC (Industrial and Commercial Bank of China) Pakistanto start offering services in 2015.
Though this was on a relatively small scale, the groundwork had begun topromote bilateral trade and investment in the respective local currencies.
Now the Bank of China is the second Chinese bank to enter the Pakistanimarket, but it is much more significant as it has fourth and fifth globalranking currently in terms of Tier 1 capital and total assets respectively.
At the inauguration ceremony that took place in Islamabad, Bank of Chinachairman Chen Siqing observed that the Karachi branch would be the bank’sfirst in South Asia, saying that it was ‘a great honor’ and that this wouldstrengthen the ‘brotherly relations’ between the two countries in thefinancial sector.
Launching the settlement and clearing mechanism provides yuan liquidity forthe inter-bank market to make the smooth transition from the US dollar tothe yuan.
Bringing the yuan to this level has taken about three years to enforce, andthe SBP announced its readiness for using the yuan for bilateral trade andinvestment activity in January. In preparation for a comprehensive bankpolicy, arrangements were made for carrying out exports, imports andtransactions with China only in yuan.
By reducing time delays and ensuring a steady remittance flow, it will bemuch easier for both Chinese and non-Chinese companies to invest inChina-Pakistan Economic Corridor (CPEC) projects from now on.
Notably, this is the second currency swap agreement inked with a Chinesebank. Assessing the development, Dr Ashfaque H Khan, dean of the NUST(National University of Sciences and Technology) School of Social Sciences,has said, ‘This is a good thing that the central bank has done.
This is going to reduce pressure on demand for dollars because [the] tradedeficit with China is contributing significantly to widening of thecurrent-account deficit. With this measure, it will help reduce currentaccount deficit as well which will further reduce our financingrequirement, going forward.’
Meanwhile in China, the Pakistani Habib Bank maintains a presence aftersigning an accord with the China Development Bank in April 2016 and carriesforward cross-currency trade. Allowing the Habib Bank to provideforeign-currency liquidity for development projects in Pakistan, this isthe very first such agreement between a Chinese and a Pakistani bank.
Receiving the license also makes it the first South Asian lender to operatea branch in China, while it is the first Pakistani local financialinstitution to receive both medium- and long-term financing in a foreigncurrency.