Islamabad is considering plans to replace the U.S. dollar with the Chinese yuan for all future bilateral trade between Pakistan and China, the Dawn reported on Tuesday.
According to Ahsan Iqbal, Pakistan’s Minister for Planning and Development, the Pakistani national currency would continue to be used domestically, but China’s insistence on using the yuan for bilateral trade has ignited a new set of talks among Pakistani officials.
While speaking to India’s Economic Times, Iqbal said that Pakistan is currently “examining the use of yuan instead of the U.S. dollar for trade between the two countries,” adding that the use of a foreign currency was not against the interest of Pakistan. Stating that such a deal could only benefit the country and that Pakistan’s recent reluctance to use the yuan has not stopped any CPEC investments in Pakistan from going through.
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“All projects already identified and committed by the two sides were going through the codal formalities and moved into the implementation phase on completion of these procedures,” he continued.
Iqbal’s address to the media came just days after the formal launch of Long Term Plan (LTP) for the China-Pakistan Economic Corridor was signed by the two sides. The LTP highlights key cooperation areas between China and Pakistan and includes road and rail connections, information network infrastructure, energy, trade and industrial parks, agriculture, poverty alleviation, and tourism. By signing the LTP, both countries have finally revealed for how long they plan on working on the project. According to a report from Russia Today, the plan will be implemented in three phases, the first one ending in 2020, followed by the second in 2025, with the final phase scheduled to be completed in 2030.
With China pledging to invest almost $57 billion in Pakistan in order to fund CPEC, a currency swap arrangement comes as no surprise. According to Reuters, a bilateral payment and settlement system is also expected to be formulated in the near future, creating a strong cross-border credit system and securing financial services between the neighboring countries.
China’s first big move against the dollar
Earlier this year, the Chinese government announced plans to start a crude oil futures contract priced in yuan and convertible into gold. Enabling the country’s trading partners either to pay with gold or convert yuan into gold removes their need to keep money in Chinese assets. The deal also enables investors to skip the dollar altogether in favor of the often more stable yuan.
The deal’s main importance, though, lies in allowing exporters to avoid U.S.-imposed sanctions by trading oil in yuan. With the clause aimed at large exporters such as Russia, Iran, and Venezuela, China’s ambitious plans to create its own benchmark were bound to become a game-changer not just in the oil industry, but in Chinese trade in general.
However, with CNBC quoting Gal Luft, co-director of the Institute for the Analysis of Global Security, as saying that China’s benchmark was not a game changer, but rather an indicator of the dollar’s “glacial decline,” a definite move by one of China’s allies in CPEC was heavily expected.
Therefore, despite Pakistan’s immediate refusal to allow the yuan to be used in the Gwadar Free Zone, it was obvious that the decision was not absolute. Back in November, The Dawn reported on multiple Pakistani officials confirming that the issue of the yuan would be discussed again at the CPEC Joint Cooperation Committee meeting. Following the Joint Committee meeting, Pakistan established the Customs Special Supervised Areas along the CPEC routes, initiated in order to enable Chinese investments in Special Economic Zones such as the one in Gwadar.
With the JCC meeting yielding very positive and very promising dialogue, the two countries were expected to find common ground when it comes to the use of national currencies by the end of the year.
If Pakistan decides on dumping the dollar altogether in favor of the yuan, CPEC might see pending or delayed deals coming through faster than originally predicted. Keeping the Pakistani rupee in all domestic trade, and using the yuan only for bilateral trade will make sure Pakistan’s foreign reserves won’t be reduced. However, using the yuan has the potential to compromise Pakistan’s sovereignty. With a country run by an increasingly corrupt government and lacking the funds and infrastructure it needs to boost its struggling economy, a heavy Chinese influence might prioritize the future of CPEC over that of Pakistan.