The Yuan reality

There was some confusion about the use of Chinese currency, Yuan, for bilateral trade and investment with Pakistan. In order to avoid this confusion, the State Bank of Pakistan on 2nd January, 2018 made it clear that Pakistani and Chinese enterprises were free to trade and invest in Chinese Yuan (CNY) instead of other currencies like US dollar and British pound for international trade. In this regard, Industrial and Commercial Bank of China Ltd (ICBC) Pakistan had been allowed to establish a local CNY settlement and clearing setup in the country to open CNY accounts of the banks operating in Pakistan and to facilitate settlement of CNY-based transactions such as remittances to/from China. SBP had already put in place the required regulatory framework, facilitating use of CNY in trade and investment transactions such as opening of L/Cs and availing financing in CNY. SBP had also established a loan mechanism for banks to get the CNY financing from banks for onward lending to importers and exporters having underlying trade transactions denominated in CNY. The modus operandi of this liquidity facility had already been explained in various circulars issued earlier by the SBP from time to time. In Pakistan, Yuan is already at par with other international currencies such as Dollar, Euro and Japanese Yen etc.
The clarification given by the SBP with regard to the use of Yuan is quite comprehensive and was very much needed due to the lack of clarity on the subject. The SBP, in its capacity of the policymaker of financial and currency markets has taken various policy related measures to ensure that imports, exports and financing transactions could be denominated in Yuan. This was important because the SBP expects growing size of trade and investment with China, particularly under the CPEC and foresees that CNY denominated trade with China will increase significantly going forward. In 2016-17, Pakistan exported goods and services worth dollar 1.62 billion to China while imports from China were as high as dollar 10.57 billion, reflecting a imbalance. The two countries have not concluded FTA-II which may benefit exports from Pakistan. Whether the use of Yuan as a result of various agreements could increase exports from Pakistan and narrow the trade deficit is difficult to say but the increasing use of Yuan could be helpful in promoting investment and trade between the two countries besides economising the use of other hard currencies like Dollar and Japanese Yen. Residents are also allowed to open foreign currency accounts in Yuan but the amount in these accounts may be insignificant. It seems that increased use of Yuan in trade and investment transactions could facilitate business community to a certain extent and the SBP has devised a proper mechanism for this purpose but the long-term impact of such a measure on the economy of Pakistan cannot be predicted with any measure of certainty at this point of time.