By Lin Zihan, Recently, a Chinese-made aircraft leased by Indonesia arrived in Jakarta. It marked China’s first cross-border leasing of a homegrown aircraft settled in offshore Chinese yuan. As China reaches agreements with more trading partners and strengthens the use of local currencies in international trade and financial transactions, cross-border transactions between China and other countries are expected to enjoy greater convenience. This will provide new opportunities for the cooperation on bilateral and regional trade and investment.
Cai Qingfeng, a professor at the School of Economics, Xiamen University and deputy dean of the university’s Belt and Road Research Institute, said that the use of local currency settlement aligns with the growing trade between China and the relevant countries and regions, reflecting the increasing demand for trade. “China has become a main trading partner of over 140 countries and regions, with its total trade in goods ranking first in the world. China has maintained the largest trading partner of ASEAN for years. It is also the largest trading partner of Africa and second largest of Latin America,” said Cai.
He said China has close economic and trade relations with major economies around the world, and its economy is deeply integrated into the global industrial, supply and value chains. “This provides a broad range of application scenarios and practical demand for promoting local currency settlement,” said Cai.
China and relevant countries have achieved fruitful results in the bilateral local currency settlement arrangements.
In September 2021, the People’s Bank of China and Bank Indonesia announced the launching of a cooperation framework for promoting the use of local currencies for settlement of bilateral trade and direct investment between China and Indonesia.
This made Indonesia another Belt and Road partner country to establish a bilateral local currency settlement agreement with China, following Vietnam, Laos, Russia, and other six countries. In early 2023, China and Brazil signed a memorandum of cooperation to phase in the yuan clearing arrangement in Brazil. Brazil announced that it would conduct bilateral trade settlement with China using a local currency.
In March 2023, Chinese and French companies completed the first cross-border yuan-settled trade of liquefied natural gas. “Local currency settlement, driven by the demand for economic and trade exchanges, is a mutually beneficial choice that aligns with the interests of both parties,” said Zou Jingxian, associate professor at the National Academy of Development and Strategy, Renmin University of China.
China has close economic and trade ties with Belt and Road partner countries and other members of the Regional Comprehensive Economic Partnership, Zou said, adding that the demand for trade provides a solid foundation for promoting cooperation in local currency settlement between China and its foreign partners. “Using local currency settlement can streamline the exchange process, reduce the economic and time costs of transactions, and provide convenience for cross-border trade. At the same time, local currency settlement helps avoid the exchange rate risks caused by fluctuations in the value of the U.S. dollar, thus reducing exchange losses and easing pressure on foreign exchange reserves,” said Cai. “Using local currency settlement will encourage Brazilian companies to actively participate in the Chinese industrial chain, especially in areas such as electric vehicles, clean energy, biotechnology, and precision agriculture,” said Marcos Pires, director of the Institute of Economics and International Studies at Brazil’s Sao Paulo State University.
From a financial perspective, local currency settlement can generate a significant amount of Brazilian real and Chinese yuan capital, thus driving direct investment, Pires added. According to data from the People’s Bank of China, China’s cross-border receipts and payments in Chinese yuan totaled 52.3 trillion yuan in 2023, growing 24.2 percent year on year.
In particular, cross-border yuan payments for trade in goods accounted for 25 percent of the total cross-border payments for trade in goods in both domestic and foreign currencies during the same period, an increase of 7 percentage points compared to 2022.
By the end of 2023, the coverage of the Cross-Border Interbank Payment System has expanded to 182 countries and regions worldwide. Zou stated that the Chinese yuan enjoys strong international credibility. China’s comprehensive strength, responsible monetary policies, steady economic growth, and ample foreign exchange reserves, among other factors, serve as reassurances for other countries to accept and use the currency.
She further pointed out that for a currency to be widely used in settlement and clearing, an efficient payment system is indispensable. Currently, China is at the forefront globally in areas such as mobile payments and the use of digital currency.
Cai noted that promoting local currency settlement cooperation between China and other countries and regions benefits the diversification of the international monetary system, mitigating the negative impacts of the U.S. Federal Reserve’s monetary policies and exchange rate risks on global economic fundamentals.
“Local currency settlement cooperation between China and relevant countries and regions will further unleash global economy’s potential for trade and investment,” said Cai.
He noted that promoting local currency settlement cooperation will continuously create favorable conditions for trade and investment between China and its Belt and Road partner countries. This will strengthen economic ties between China and relevant regions, and facilitate investment and trade within those regions.
