Currency clearing mechanism seen to boost trade, investment between the two countries
On Sept 6, the People's Bank of China and Bank Indonesia launched the bilateral local currency clearing mechanism based on an LCS framework. Under this scheme, dealers are allowed to use direct exchange-rate quotes in China-Indonesia trade and investments.
The central banks of China and Indonesia have appointed Bank of China and its Jakarta branch as the cross-currency dealers to complete the first forex transactions between the renminbi and the rupiah based on direct quotes.
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Bank of China is among the appointed cross-currency dealers, or ACCDs, for renminbi-rupiah transactions.
The launch of the bilateral local currency clearing mechanism based on a local currency settlement framework is win-win cooperation as it promotes the globalization of both the renminbi and the rupiah, according to the Bank of China (Hong Kong).
The launch of the bilateral local currency clearing mechanism based on a local currency settlement framework is win-win cooperation as it promotes the globalization of both the renminbi and the rupiah, according to the Bank of China (Hong Kong)
Nicholas Antonio Mapa, senior economist in Dutch investment bank ING, said that this "initiative was carried out to facilitate trade between the two countries".
The LCS agreement comes into force at a time when China and Indonesia are strengthening their economic ties.
China is one of Indonesia's biggest investment and trading partners. In 2020, bilateral trade between China and Indonesia reached US$78.4 billion, according to China's Ministry of Commerce.
The Indonesian embassy in China and Mongolia said Indonesia's exports to China reached US$37.4 billion in 2020, an increase of 10.1 percent compared with 2019.
Indonesian Ambassador Djauhari Oratmangun said in April that China has confirmed plans to invest US$1.38 billion in Indonesia's furniture industry, according to a report by Indonesian state-owned news agency Antara.
Djauhari said Indonesia-China relations remained positive even amid the COVID-19 pandemic, with Chinese investment in Indonesia reaching US$4.8 billion in 2020.
A senior executive in an Indonesian bank said a growing number of the bank's clients are using the renminbi either for trade and traveling to China. Likewise, Chinese traders are entering Indonesia for its large market; the Southeast Asian nation is home to over 270 million people and is the world's fourth most populous country.
"Chinese brands like Huawei are becoming more popular in Indonesia," he said, alluding to the proliferation of mobile devices by the Shenzhen-based technology giant in the country.
Mapa of ING cited the two countries' trade partnership and how this can also help further develop the Belt and Road Initiative.
"Indonesia is a major supplier of commodities that China will likely need in volume for its Belt and Road infrastructure projects," he said.
Chinese and Indonesian central banks signed the LCS agreement in 2020, with the aim of promoting the local currencies in bilateral trade and investment transactions. The agreement was enforced a year later.
Wee Ee Cheong, deputy chairman and chief executive officer of the Singapore-based United Overseas Bank (China) Ltd said the LCS agreement will benefit their clients in China and across Southeast Asia
The cooperation with PBOC extends BI’s existing LCS cooperation framework with other central banks in Asia including the Bank of Thailand, Bank Negara Malaysia, Bangko Sentral ng Philipinas, and the Ministry of Finance of Japan.
The PBOC also linked up with the China Foreign Exchange Trade System, or CFETS, to launch a regional foreign exchange platform in East China’s Zhejiang province. This allows direct quotation and transaction of renminibi and Indonesian rupiah foreign exchange among all 20 authorized appointed cross currency dealers via the CFETS platform, which will further enhance the LCS mechanism between the China and Indonesia.
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Wee Ee Cheong, deputy chairman and chief executive officer of the Singapore-based United Overseas Bank (China) Ltd said the LCS agreement will benefit their clients in China and across Southeast Asia.
"We see their increasing need for effective cross-border solutions, from financing and cash management to foreign exchange. By facilitating our clients' use of local currencies for their regional operations, we will also help to drive greater trade and investment flows along the China-ASEAN corridors while contributing to intra-regional financial integration and cooperation," Wee said in a statement.
UOB's subsidiaries in China and Indonesia are also ACCDs. Other banks commissioned to serve as ACCDs include Agricultural Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Maybank, Bank Central Asia, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank of Ningbo, Bank OCBC NISP, Bank Permata and Bank Rakyat Indonesia.
The LCS is also in line with the two countries' membership in the Regional Comprehensive Economic Partnership, the world's largest free-trade agreement. China and Indonesia are among the 15 countries that signed the pact in November 2020. RCEP will progressively reduce tariff rates, eliminate trade barriers and bolster investments among the 10 members of the Association of Southeast Asian Nations, China, Japan, South Korea, Australia and New Zealand.
Yang Han in Hong Kong and Leonardus Jegho in Jakarta contributed to this story
HONG KONG NEWS