According to a recent report by the Bank of Thailand, China and Thailand are exploring the use of their local currencies for bilateral trade settlements. The aim is to reduce reliance on the US dollar and enhance financial cooperation between the two countries. The report claims that using yuan and baht for trade payments could lower transaction costs, increase efficiency, and facilitate trade flows. It also highlights the potential benefits of developing a cross-border payment system and a currency swap arrangement between China and Thailand.
In January 2021, both countries renewed the Chinese Yuan – Thai Baht Bilateral Currency Swap Arrangement for a period of five years. This arrangement allows for the exchange of local currencies up to RMB 70 billion or THB 370 billion.
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. To reduce this reliance, some banks are exploring the possibility of using the Chinese yuan and the Thai baht as direct payment currencies.
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 market’s outstanding foreign debt securities have been denominated in dollars for the past few years, and 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
Banks such as the Industrial and Commercial Bank of China (ICBC) and Bangkok Bank are exploring the possibility of using yuan and baht as payment currencies to reduce conversion costs, enhance cash flow efficiency, and hedge against exchange rate fluctuations. Bangkok Bank 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
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 ASEAN Finance Ministers and Central Bank Governors recently discussed the transition of financial transactions away from reliance on major currencies towards settlements in local currencies through the Local Currency Transaction (LCT) scheme.