The Manila-based Asian Development Bank (ADB) recently decided to support deals denominated in the Indian rupee and the Chinese renminbi under its Trade Finance Programme (TFP), which fills market gaps for trade finance by providing guarantees and loans to banks to support trade. ADB took this decision since it expects an increase in intra-regional trade transactions using the two Asian currencies.
An ADB statement said over 50 per cent of TFP’s portfolio has supported intra-regional trade and the move to include the two currencies will bolster TFP’s ability to enhance its support for trade within developing Asia. TFP has supported over $10.6 billion in trade since 2009 and used to cover only transactions denominated in the US dollar, the Japanese yen and the euro. Through this move, ADB expects to promote intra-regional trade that, in turn, would lead to greater economic cooperation and employment in Asia.
According to ADB, intra-regional trade in Asia in the next 10 years is expected to account for at least half of all foreign trade for Asian countries. At present, 90 per cent of all foreign trade in Asia is settled in the US dollar, but this percentage, ADB is of the view, is expected to decline.
In May 2012, the World Trade Organisation’s (WTO’s) Economic Research Division published a working paper titled “Use Of Currencies In International Trade: Any Changes In The Picture?”
This paper reiterated ADB’s view that “as intra-Asia trade expanded (its share of total Asian trade increased from 49.1 per cent in 2000 to 52.6 per cent in 2010), the US dollar remained in the region at least until recently a major, if not the main, invoicing and settlement currency for international trade”.
The WTO paper quoted data published by Goldberg and Tille (2008) that stated that “the US dollar share in export invoicing of Korea and Japan was as high as 84.9 per cent and 52.4 per cent, respectively, in the early 2000s. The share of Australia’s exports denominated in US dollars was 67.9 per cent. Thailand’s export and import share in US dollars exceeded 80 per cent”.
The WTO paper reviewed a number of issues related to the use of currencies in international trade in the backdrop of the introduction of the euro about a decade ago and the recent steps taken by Beijing to liberalise the use of the renminbi in offshore markets.
Trade, the paper argues, is an important factor in establishing a currency at the global platform. The paper says a “well prepared liberalization of currency use for international trade and foreign direct investment transactions can even be helpful in achieving the international investment and reserve currency status. While in the distant past the later was also linked to preponderance of a country in trade markets, it is now linked to the prevalence of the currency in international financial transactions, which supposes that the country in question engages at least partly in some liberalization of capital account transactions”.
The paper primarily looks at how the Chinese renminbi will become a more important international currency in the coming years. It argues that the strength of a currency would also depend on the size of the transaction and the need for the exporter and importer to ensure that there is minimal fluctuation in the currency. The paper states that even today when Canadian exporters negotiate a large order, they like to invoice in the Canadian dollar.
The paper states, “since the introduction of the Euro, two currencies (US dollar and Euro) are dominating the world market for currencies. Other currencies such as the Pound Sterling and the (Japanese) Yen are still important but are regarded as no substitutes to the US dollar and the Euro by the markets. The RMB can be an alternative in the medium to long term, but remains scarce by such definition — not that it is not stable or available for trade, but it still offers limited convertibility, and hence limited liquidity globally and no hedging facilities”.
ADB’s move will strengthen the Chinese renminbi as an international currency, especially in the regional context. For the Indian rupee, it is only the beginning and it has to go a long way before it comes close to any of the global currencies for international trade.
The writer is Principal Advisor at APJ-SLG Law Offices