Can Chinese credit in yuan meet country's present need?

Asjadul Kibria | Published: May 18, 2024 21:14:35

Advanced developing countries like China and India have been trying to push their currencies in the bilateral trade settlement with their different trading partners like Bangladesh for a long time. The core logic is that it will help reduce the risk of volatility in the international dollar market. As Bangladesh has been facing bilateral trade deficits with both countries for a long time, it seems logical to use Chinese and Indian currencies to settle a part of the import payments.
Official statistics showed that Bangladesh's exports of goods to India stood at US$2.13 billion in FY23 against imports of $9.50 billion. So, the trade gap with India reached $7.37 billion in the last fiscal year. Again, exports to China were only $0.68 billion during the period under review, whereas imports from the country were recorded at $17.83 billion. Thus, the bilateral trade deficit with China stood at $17.15 billion in the last fiscal year.
Bangladesh has to use the US dollar to settle the deficit payments, which creates pressure on the country's foreign exchange reserve. It also led to a big depreciation of the local currency against the greenback. The country's forex reserve has been depleting rapidly for the last two years due to the settlement of higher import payments against lower export earnings. To check the depletion of the forex reserve, the government took a series of steps to restrict imports and reduce the outflow of the US dollar. The restrictive measures paid off to some extent, as overall import payments were reduced by 15 per cent in FY23 over FY22. The declining trend has continued in the first nine months of the current fiscal year.
Nevertheless, restricting the import is a temporary measure, and it can bring benefits for the time being. But it is difficult to continue the import restriction for a more extended period. That's why other alternatives like the use of local currency to settle a part of international trade may be beneficial for countries facing the deficit. Now, trading partners enjoying trade surpluses push for using their respective currencies as the countries facing deficits are on the back foot. This is the case for Bangladesh now, and both China and India argue that Bangladesh should settle the import bills in yuan and rupee, respectively. One, however, needs to keep a few things in mind to understand the implications of the move.
First, five currencies now constitute the Special Drawing Rights (SDR), an international reserve asset created by the International Monetary Fund (IMF) to supplement the official reserves of its member countries. The currencies are the US dollar, Euro, Chinese Yuan, Japanese Yen, and British Pound. Second, currently, around 59 per cent of the global foreign exchange reserve portfolio is in the US dollar (at the end of 2023). According to the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER), the ratio of Euro is 20 per cent. The ratios of other major currencies are: Japanese Yen (5.70 per cent), Canadian dollar (2.60 per cent), Chinese Yuan (2.30 per cent) and Australian dollar (2.10 per cent). The rest of the amount includes some other currencies, including Swiss Francs. Third, the Chinese currency (CNY) is now in fourth position for settling international payments, though the ratio is still less than five per cent of the total settlement.
From what mentioned above, it becomes clear that the Chinese Yuan is the only currency among the developing nations that is much more advanced than its peers. It is also internationally recognised as a reserve currency, besides being one of the leading currencies of developed nations. It means any country can use CNY, like the US dollar or Euro, to settle international payment bills like the US dollar or Euro. At least no country can say that CNY is not a reserve currency, regardless of whether they use it or not. Indian rupees or other currencies of developing nations have to go a long way to catch the Chinese currency now.
Meanwhile, a media report suggested that China has already expressed its interest in offering Bangladesh more than CNY 36 billion in the form of a 'trade facility'. The amount is equivalent to US$5 billion or Tk 585 billion. If the loan is available, it may help repay a part of the Chinese import bill in Chinese currency, reducing some pressure on the dollar reserve.
As the Chinese proposal is new in type, Bangladesh needs to scrutinise it cautiously. Flexibility of repayment and interest is critical. The government has already decided to negotiate with China to make the proposed CNY loan as a long-term budget support with flexible terms and conditions.
Moreover, the Chinese proposal has geopolitical implications. During the last decade, Bangladesh-China bilateral economic-commercial relations have deepened, an unpalatable development for both United States and India. To India, China's growing 'footprint' in Bangladesh is much 'alarming' mainly due to its own geo-strategic concerns. Over the years, China has invested in some mega infrastructure projects, including Padma Bridge, and also expressed a desire to invest more, mostly in terms of loan or credit.
As Chinese investment and finance are surging, Indian officials, along with a section of researchers and media analysts, have started sounding an alarm bell expressing their reservations about Bangladesh-China's economic relations. They are trying to argue that Bangladesh is heading towards a danger of what they term a 'Chinese credit trap'. The proposed CNY loan may spark another round of discouraging words from India, although it is a bilateral matter between Bangladesh and China.
Currently, one-fourth of Bangladesh's total imports is from China. Many Chinese workers are working in various development projects in Bangladesh. If a part of the import bill and payments of Chinese workers can be settled in CNY, it may be helpful when the country's foreign reserve is depleting, although things are not as simple as they seem. There are procedural complexities, along with the risks of high interest rates and stringent repayment conditions.
Nevertheless, after proper negotiation, Bangladesh needs to think positively about accessing the credit in Chinese currency. Internal mismanagement and governance issues, coupled with geopolitical turmoil, have threatened the country's macroeconomic stability. It now requires some prudent measures to meet the challenges.
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