After establishing its first branch in Karachi, the commercial capital of Pakistan, last November, the Bank of China recently launched a clearing and settlement mechanism of Chinese yuan.
Having received clearance from the State Bank of Pakistan (SBP) for denominating foreign-currency transactions, one of the main targets of the Long-Term Plan of the China-Pakistan Economic Corridor for 2017-30 has been achieved. Giving the yuan equal status to the US dollar in Pakistan strengthens the financial bonds between these “all-weather strategic partners.”
Up to now, Pakistan’s foreign-exchange regime conducted international trade only in dollars. Working on changing over to bilateral trade in yuan with China, the SBP has been gradually enforcing and organizing the switch-over.
Expecting the new mechanism to cut costs greatly and speed up efficiency for yuan transactions and enhance market liquidity, the SBP believes this arrangement will elevate the trade relationship between Pakistan and China. Back in 2012, the first currency swap agreement was signed by the SBP with the People’s Bank of China, and this was followed up by allowing banks to give trade loans in yuan and also accept deposits in the Chinese currency.
Devising a loan mechanism for banks to get yuan financing, the SBP initially allowed ICBC (Industrial and Commercial Bank of China) Pakistan to start offering services in 2015. Though this was on a relatively small scale, the groundwork had begun to promote bilateral trade and investment in the respective local currencies.
Now the Bank of China is the second Chinese bank to enter the Pakistani market, but it is much more significant as it has fourth and fifth global ranking currently in terms of Tier 1 capital and total assets respectively.
At the inauguration ceremony that took place in Islamabad, Bank of China chairman Chen Siqing observed that the Karachi branch would be the bank’s first in South Asia, saying that it was “a great honor” and that this would strengthen the “brotherly relations” between the two countries in the financial sector.
Launching the settlement and clearing mechanism provides yuan liquidity for the inter-bank market to make the smooth transition from the US dollar to the yuan.
Bringing the yuan to this level has taken about three years to enforce, and the SBP announced its readiness for using the yuan for bilateral trade and investment activity in January. In preparation for a comprehensive bank policy, arrangements were made for carrying out exports, imports and transactions with China only in yuan. By reducing time delays and ensuring a steady remittance flow, it will be much easier for both Chinese and non-Chinese companies to invest in China-Pakistan Economic Corridor (CPEC) projects from now on.
Notably, this is the second currency swap agreement inked with a Chinese bank. 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] trade deficit with China is contributing significantly to widening of the current-account deficit. With this measure, it will help reduce current account deficit as well which will further reduce our financing requirement, going forward.”
Meanwhile in China, the Pakistani Habib Bank maintains a presence after signing an accord with the China Development Bank in April 2016 and carries forward cross-currency trade. Allowing the Habib Bank to provide foreign-currency liquidity for development projects in Pakistan, this is the very first such agreement between a Chinese and a Pakistani bank.
Receiving the license also makes it the first South Asian lender to operate a branch in China, while it is the first Pakistani local financial institution to receive both medium- and long-term financing in a foreign currency.