China to work with Asian neighbours to grow use of local currencies over US dollar in trade, investment
- Central bank governor Yi Gang said China will work with Asian countries to strengthen the use of local currencies in trade and investment
- Bilateral currency swaps among the Association of Southeast Asian Nations (Asean) regional grouping, China, Japan and South Korea have reached US$380 billion
China will work with Asian countries to strengthen the use of local currencies in trade and investment, Yi Gang, the governor of the central bank, said on Wednesday, as part of plans to strengthen regional economic resilience.
Recent years’ progress by emerging Asian nations in using local currencies in trade and investment has strengthened the region’s financial safety net against external shocks, Yi told an event of the Group of 20 (G20) grouping.
“Emerging markets should improve their resilience,” Yi said by video at the event hosted by Indonesia. “This is where regional cooperation has a key role to play.”
Bilateral currency swaps among the Association of Southeast Asian Nations (Asean) regional grouping, China, Japan and South Korea have reached US$380 billion, he said.
Last month, the People’s Bank of China extended a bilateral currency swap pact with Bank Indonesia for three years to deepen financial cooperation and promote investment.
“Central banks from advanced economies should continue to enhance market communications,” Yi added, as this would help mitigate the spillover effect at a time of greater risks to emerging economies from the coronavirus pandemic.
A Reuters poll showed the Fed will kick off its tightening cycle in March, with an interest rate hike of 25 basis points, but a growing minority say it will opt for a more aggressive half-point move to tamp down inflation.
Top Indonesian economic officials backed the expanded use of local currencies in trade and investment, instead of the US dollar, to help maintain stability in global financial markets as pandemic-era stimulus is withdrawn.
Indonesia, which holds the presidency of the G20 major economies this year, and a number of Asian countries have bilateral deals to settle transactions in domestic currencies, known as local currency settlement (LCS) arrangements, which cut demand for the US dollar.
Indonesian Finance Minister Sri Mulyani Indrawati said LCS arrangements should be replicated more broadly globally to manage shocks, especially given emerging nations face potential capital outflows when bigger economies tighten monetary policy.
“[LCS] has been brought into a global agenda because this can also create a financial safety net for financial transactions between countries and reduce the vulnerability risks due to global economic shocks that cause financial instability,” Sri Mulyani told a seminar ahead of a meeting of G20 finance ministers and central bank governors on Thursday.
Currency diversification would support economic stability, allowing countries to sustain their recovery from the coronavirus pandemic, she said.
Indonesian officials have said the country’s main priority for this week’s G20 meetings will be to ensure that developed economies’ exit from easy monetary policy is well calibrated, well planned and well communicated, to limit the spillover impact on developing economies.
Previous periods of global monetary tightening have triggered capital outflows from emerging countries as investors flock to put their money in safe-haven assets.
Indonesia saw the rupiah currency plummet by more than 20 per cent in 2013 during the so-called “taper tantrum”.
Bank Indonesia governor Perry Warjiyo told the seminar emerging economies will be able to weather global monetary tightening, including US rate hikes, “much better” this year compared with previous periods of tightening.
Emerging markets, like Indonesia, had in place a better policy framework, higher foreign exchange reserves and had made efforts to deepen financial markets, he said, listing the LCS deals as an example.
LCS arrangements had cut Indonesia’s US dollar exposure by US$2.53 billion in 2021 and a further 10 per cent increase in such settlements is expected this year as Bank Indonesia sought to expand deals with other countries and develop more hedging instruments, Warjiyo said.