SBP allows Bank of China to settle transactions in yuan

The State Bank of Pakistan (SBP) has allowed the Bank of China Pakistan to establish a Chinese yuan settlement and clearing setup in Pakistan in an effort to further strengthen trade channels and remittance flows in the Chinese currency. It is indeed a major step to encourage trade with Chinese currency and eventually in the respective local currencies.

This move could further bolster the size of trade and investment with China under China-Pakistan Economic Corridor (CPEC). The State Bank is continuously taking policy measures to ensure that imports, exports and financing transactions with China can be denominated in Chinese yuan (CNY). In this regard, the SBP also signed a Currency Swap Agreement with the People’s Bank of China with the objective of promoting bilateral trade and financing direct investment between the two countries in the respective local currencies.

According to SBP, with this arrangement, BOC can open CNY accounts of the banks operating in Pakistan, to facilitate settlement of CNY-based transactions such as remittance to/from China. BOC can also provide CNY liquidity to the interbank market for the settlement of CNY-based transactions.

Industrial and Commercial Bank of China Limited (ICBC) Pakistan has already been allowed by SBP to offer similar services since 2015.

“In order to further strengthen the trade channels and remittance flows in Chinese yuan, SBP has now allowed Bank of China (BoC) Pakistan to establish a local yuan settlement and clearing setup in Pakistan,” the State Bank of Pakistan (SBP) said in a statement.

“BoC can open yuan accounts of the banks operating in Pakistan, to facilitate settlement of yuan-based transactions such as remittance to/from China. BoC can also provide yuan liquidity to the interbank market for the settlement of yuan-based transactions.”

The SBP expects this settlement and clearing mechanism to reduce costs and increase efficiency for the local banking system in transacting in Chinese yuan, enhance market liquidity and facilitate settlement of growing trade and investment transactions between China and Pakistan in the said currency.

“Keeping in view the recent local and global economic developments, SBP expects this initiative to yield long-term benefits to China-Pakistan relationship in general, and Pakistan’s economy and banking system in particular,” it said