China wants to use its yuan as financing currency instead of the US dollar for projects to be funded under Preferential Buyer's Credit (PBC) to skip phenomenal forex tantrums, officials said.
The Export-Import (ExIm) Bank of China has proposed to Bangladesh that it wants to finance the PBC- funded projects partly or fully with yuan, the Chinese currency, in the wake of severe fluctuation in exchange rate of the USD that nearly emptied many countries' foreign-exchange reserves.
In a recent letter to the Economic Relations Division, LI Qinxi, a general manger of the Chinese bank, wrote that the bank had successfully financed a batch of projects under PBC and governmental concessional -loan (GCL) facility which generated good social and economic benefits.
He said the PBC loan comprises the major portion of them and "there is still great potential for bilateral cooperation with PBC facility".
"However, in view of the current significant fluctuations in the US dollar exchange rate accompanied with the interest-rate-benchmark hike by the Federal Reserve, both sides are bearing significant risks such as high financing cost, exchange-rate risk etc," the letter reads about the reasons for making the move for what is being called 'de-dollarisation' as a latest economic terminology.
He further mentioned that the shortage of USD stands in the way of much-needed bilateral cooperation between nations.
"The rising cost for the USD in the market may also lead to interest-rate increase for the following PBC- financed projects," he wrote.
Mr Qinxi pointed out that the yuan has been recognized as an SDR-basket currency and has become "one of the most stable" currencies in recent years.
Using yuan as the financing currency could distract the risk borne by the fluctuation in USD exchange rate as well as interest rate and relieve stress stemming from the shortage of USD.
Also pointed out a fact that the projects implemented by Chinese contractors usually have big demand for yuan settlement. The yuan financing could reduce the exchange- rate cost, which, therefore, could provide favourable position to reduce the total investment for implementing the project.
Bangladesh recently opted to make transaction with China using yuan amid severe shortage of US dollars amid significant fall in foreign-currency reserves.
To this effect, the Bangladesh Bank in last September allowed the authorised dealer banks (ADs) to carry out transactions in yuan for trade with China alongside the dollar.
The central bank in its order said: "To bring a wider scope, it has been decided that ADs may maintain accounts in yuan with their correspondents/branches abroad for settlement of cross-border transactions executed in this currency."
Last year's order followed another order issued in 2018 which allowed the dealer banks to open foreign- currency clearing accounts with Bangladesh Bank in the Chinese currency.
China, in recent times, has been building an alternative payments system called 'cross-border inter-bank payments system (CIPS)'.
Dr Zahid Hussain, a former lead economist at the World Bank's Dhaka office, thinks that taking loans in yuan from China instead of US dollar puts risks on Bangladesh's part.
"Fixing yuan as financing currency means we are taking exchange-rate risks on our shoulders," he told the FE on Friday.
He makes a point on this score that most of Bangladesh's forex earnings come in US dollar. "Have there been huge earnings of Bangladesh in yuan, we may have a chance to make gain in case of yuan appreciating against US dollar," says Mr Hussain about the chances of a tailwind.
Bangladesh earns around $1.0 billion by exporting goods to China while imports from the vast economy goods worth $15 billion annually.
syful-islam@outlook.com