Growing Reliance on Beijing
In a significant development, Pakistan has utilized China’s currency, the yuan, to pay Russia for a substantial purchase of discounted crude oil. This marks the first time that Islamabad has used yuan to settle cross-border trade transactions with a third country. The move highlights Pakistan’s increasing dependence on China as it grapples with a severe balance of payment crisis and struggles to secure enough dollars for its rising international purchases, particularly fuel.
A senior official from the State Bank of Pakistan (SBP) stated that the use of yuan to import Russian oil signifies an emergency situation for Pakistan. The country’s dollar reserves have diminished to the extent that they can cover less than a month’s worth of imports. However, this move holds strategic importance for China, as Beijing aims to promote the global utilization of the yuan as a stable and credible alternative to the dollar.
Over the years, the increased use of the yuan for bilateral trade with China has provided considerable relief to Pakistan, reducing its reliance on the U.S. dollar. Pakistan has conducted a portion of its annual goods and services trade with China in yuan, amounting to CN¥30 billion in the fiscal year 2021, under a Currency Swap Arrangement. This reduced Pakistan’s dependence on the greenback by $4.5 billion annually, alleviating pressure on its dwindling foreign exchange reserves amid a deteriorating external account crisis.
Pakistan is not alone in turning to the yuan due to a scarcity of dollars. Other economies facing dollar shortages have also begun relying on the yuan. Argentina, for instance, has decided to pay for its Chinese imports in yuan to protect its diminishing dollar reserves. The trend is also visible in other countries grappling with economic distress, seeking to trade with Russia despite sanctions, or aiming to enhance trade with China.
The global shift towards stable currencies such as the yuan and the formation of regional trade alliances in local currencies are becoming increasingly prevalent. The yuan is gaining traction as a preferred currency for international trade, national forex reserves, and investments. Several countries, including India, Argentina, Brazil, South Africa, the Middle East, and Southeast Asia, are intensifying efforts to reduce their reliance on the dollar and promote the use of the yuan.
China’s currency is gradually being adopted for international payments, with analysts suggesting that it could establish a trading system parallel to the dominant dollar. Recent examples include China and Saudi Arabia conducting their first transaction in yuan, while Iraq and Bangladesh have expressed intentions to settle trade directly in yuan. Furthermore, the yuan’s share of global payments has been steadily increasing, reflecting its growing acceptance and use.
While the world is moving away from a dollar-dominated financial system, it is premature to assume that the yuan will replace the dollar anytime soon. The global adoption of the yuan as a primary currency for larger trade volumes independent of China will require considerable time. However, the yuan is poised to benefit the most from the ongoing shift away from the dollar-dominated financial system.
Pakistan, being part of the China-Pakistan Economic Corridor and the Belt and Road Initiative, stands to gain from this shift in the global financial system, despite the current magnitude being relatively small. To maximize the advantages, it is crucial for Pakistan to attract significant investments, particularly through the relocation of Chinese industries to the country, to boost exports and bridge the significant trade deficit with Beijing, amounting to nearly $20 billion, according to former investment minister Haroon Sharif.
Economic Analysis over the news article by MR. ShayaN
Analysis: Pakistan’s Use of Chinese Yuan for Oil Payments and its Impact on Pakistan, Global Trade Standards, and US Relations
Effect on Pakistan:
a) Addressing Balance of Payment Crisis: Pakistan’s increasing reliance on the Chinese yuan reflects its urgent need to manage a crippling balance of payment crisis. With dwindling dollar reserves, Pakistan is turning to alternative currencies to settle its international purchases, particularly fuel. The use of yuan provides a temporary solution to mitigate the pressure on Pakistan’s foreign exchange reserves.
b) Reduced Dependence on the Dollar: The growing use of the yuan for bilateral trade with China has significantly reduced Pakistan’s reliance on the US dollar. By conducting a portion of its trade with China in yuan, Pakistan has lessened its exposure to fluctuations in the dollar exchange rate and increased its economic ties with China.
Impact on Global Trade Standards:
a) Yuan as an Alternative Reserve Currency: The increasing acceptance and utilization of the yuan for international trade transactions reflect a shifting global trend away from the dominance of the US dollar. As more countries seek stable currencies and regional trade alliances, the yuan’s role as an alternative reserve currency gains prominence. This shift could lead to the establishment of a trading system parallel to the dominant dollar, potentially impacting global trade standards.
b) Diversification of Trade Settlement Currencies: The adoption of yuan for trade payments by countries facing dollar shortages highlights a growing desire to diversify trade settlement currencies. This trend fosters a more inclusive multilateral financial system and reduces the concentration of power in a single currency, potentially promoting greater stability in global trade.
US Reaction and Relations with Pakistan and China:
a) Concerns over China’s Influence: The use of the yuan for trade transactions by Pakistan, a key ally of the United States, may raise concerns in Washington. The deepening economic ties between Pakistan and China, particularly in light of the China-Pakistan Economic Corridor and the Belt and Road Initiative, might be seen as further solidifying China’s influence in the region.
b) Impact on US-Pakistan Relations: The US could interpret Pakistan’s reliance on China and the yuan as a sign of weakening ties between the two countries. It may view Pakistan’s shift away from the dollar as a threat to its own economic and geopolitical interests in the region, potentially straining US-Pakistan relations.
c) Potential Trade and Economic Implications: The US may closely monitor the use of the yuan for trade payments, particularly in sectors of strategic importance. If the trend continues and expands, the US could respond with trade restrictions or sanctions, impacting Pakistan’s access to the US market and financial systems.
Regional Implications:
a) Influence on Other Economies: Pakistan’s adoption of the yuan for trade payments, along with other countries facing dollar shortages, could inspire similar actions among economies seeking financial stability and diversification. This shift may enhance the yuan’s role in regional trade and investment, potentially impacting the influence of the dollar in those regions.
b) Strengthening China’s Economic Diplomacy: China’s push for the internationalization of the yuan is further supported by the growing acceptance of the currency for trade transactions. This strengthens China’s economic diplomacy and its aspirations for an inclusive global financial system.
In conclusion, Pakistan’s utilization of the Chinese yuan for oil payments reflects its immediate need to address a balance of payment crisis and reduce reliance on the US dollar. The trend highlights the shifting global landscape towards alternative currencies and the potential impact on trade standards. However, this move may also strain US-Pakistan relations and raise concerns about China’s growing influence. The yuan’s increasing acceptance in international trade signifies a broader trend away from dollar dominance and towards a more inclusive multilateral financial system, with implications for global trade dynamics.
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