China and Thailand are exploring the possibility of using their local currencies for bilateral trade settlements, according to a recent report by the Bank of Thailand.

The move is aimed at reducing the reliance on the US dollar and enhancing financial cooperation between the two countries. The report said that the use of yuan and baht for trade payments could lower transaction costs, increase efficiency and facilitate trade flows. The report also highlighted the potential benefits of developing a cross-border payment system and a currency swap arrangement between China and Thailand.

In January 2021 both countries have renewed the Chinese Yuan – Thai Baht Bilateral Currency Swap Arrangement which allows for the exchange of local currencies up to RMB 70 billion or THB 370 billion for a period of five years.

Thailand, which depends on China for trade and tourism, is anticipated to gain a lot from the country’s reopening, according to a World Bank’s East Asia and Pacific Economic Report.

A risky reliance on US dollar

The trade volume between China and Thailand has been growing steadily in recent years, reaching $79.5 billion in 2020. However, most of the transactions are still settled in US dollars, which adds to the exchange rate risk and transaction costs for both sides.

But high reliance on US dollars makes countries vulnerable to shifting global financial and liquidity conditions due to the lack of domestic capital market-based financing options.

According to an ADB report, the majority of the significant Southeast Asian emerging markets’ outstanding foreign debt securities have been denominated in dollars for the past few years. Invoices for international trade from, to, and within Southeast Asia are typically issued in US dollars.

Chinese yuan and Thai baht as direct payment currencies

To facilitate bilateral trade and investment, some banks are exploring the possibility of using the Chinese yuan and the Thai baht as direct payment currencies.

One of the banks that has been actively promoting yuan-baht trade settlement is the Industrial and Commercial Bank of China (ICBC), which has branches in both countries. According to ICBC, using yuan and baht as payment currencies can help reduce currency conversion costs, enhance cash flow efficiency, and hedge against exchange rate fluctuations. ICBC also offers various financial products and services to support yuan-baht trade settlement, such as cross-border remittance, trade finance, foreign exchange hedging, and cash management.

Another bank that is eyeing yuan-baht trade settlement is Bangkok Bank, which is one of the largest commercial banks in Thailand and has a branch in Shanghai. Bangkok Bank has been cooperating with ICBC and other Chinese banks to provide yuan-baht trade settlement services to its customers. Bangkok Bank also provides information and advice on the regulatory framework and market conditions of yuan-baht trade settlement, as well as other cross-border business opportunities between China and Thailand.

Enhanced financial cooperation and deepened economic integration

The benefits of yuan-baht trade settlement are not only limited to banks and their customers, but also extend to the broader economic and strategic relations between China and Thailand. By using their own currencies for trade settlement, China and Thailand can enhance their financial cooperation, deepen their economic integration, and strengthen their mutual trust. Yuan-baht trade settlement can also help promote the internationalization of the yuan and the regionalization of the baht, which can contribute to the development of a more diversified and resilient global financial system.

The topic of how to transition financial transactions away from reliance on the US Dollar, Euro, Yen, and British Pound and towards settlements in local currencies was on the agenda of an official meeting of the ASEAN Finance Ministers and Central Bank Governors that began on March 28 in Indonesia.

The meeting discussed efforts to reduce dependence on major currencies through the Local Currency Transaction (LCT) scheme. This is an extension of the previous Local Currency Settlement (LCS) scheme that has already begun to be implemented between ASEAN members.

This means that an ASEAN cross-border digital payment system would be expanded further and allow ASEAN states to use local currencies for trade.

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