PAKISTAN TO INVEST IN CHINA'S INTERBANK BOND MARKET

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Nov
5 - 11, 2012

Pakistan will invest in China's interbank market as a part of follow-up cooperation to the bilateral currency swap agreement signed between the two countries in December 2011. Last month, the People's Bank of China (PBOC) Governor Dr Zhou Xiaochuan and the State Bank of Pakistan (SBP) Governor Yaseen Anwar in Beijing signed a deal regarding investment in the China's interbank bond market. Under the deal, SBP will join a growing list of central banks investing in China's market, which is the largest RMB denominated bond market with RMB 21.4 trillion turnover during 2011. The deal provides the cash-strapped country access to the Chinese bond market, making flexible for the country's central bank to diversify and manage its foreign exchange reserves, which are on decline due to repayment of $8 billion debt to the International Monetary Fund (IMF).

China is expanding the list of central banks investing in China's interbank in a move to widen investment avenues for foreign Yuan asset holders and promote the international use of the Chinese currency. Now SBP is among the central banks of Japan, South Korea, Singapore, Thailand, Hong Kong and Indonesia that invest in China's bonds onshore.

China has already signed currency swap deals with eight of its trading partners including South Korea, Hong Kong, Malaysia, Belarus, Indonesia, Argentina, Brazil, Iceland and Singapore. Currency swap deal with Pakistan is actually a part of Chinese strategy initiated in 2008 to expand use of its tightly controlled Yuan abroad and reduce costs for Chinese traders mostly dealing in dollars and euros. The swap deals could help China to boost exports by increasing the demand of Chinese goods for foreign buyers who have Yuan to spend.

Critics say that China's tight control on the Yuan keeps it undervalued, giving Chinese exporters an unfair price advantage and hurting foreign competitors. Even some US lawmakers have asked the government to impose punitive tariffs on Chinese goods in order to force Beijing to ease its controls on the Yuan.

Under the three-year currency swap deal, Pakistan can borrow up to 10 billion Chinese Yuan while China can borrow up to Rs.140 billion. The currency swap deal allows Pakistan to borrow up to $1.5 billion.

The South Asian country urgently needs more than $1 billion for repayment of $1.2 billion to the IMF in three installments by February 2013. The failure to secure the required amount could result in resurgence of a balance of payments crisis.

The country has to repay $ 2.9 billion to the IMF in the current fiscal year, which ends on June 30. It has so far paid $600 million in the current fiscal year, while it returned $1.3 billion to the IMF in the last fiscal year.

There are concerns over declining foreign exchange reserves, which fell to $14.406 billion in the week ending October 5. The IMF has projected that reserves held by the central bank currently at $ 9.9 billion, will fall to $ 7.8 billion by the end of current fiscal year in June 2013.

Dwindling reserves raise fears of the country's default on international payments.

In 2008, the country turned to the IMF for loan under standby arrangement program to avoid a balance of payment crisis. The $ 11.3 billion IMF program ended incomplete and the country borrowed $ 7.4 billion from the Fund, while $ 3.4 billion remained undisbursed due to the non-implementation of economic reforms as demanded by the IMF.

The falling foreign exchange reserves have put pressure on Pakistani rupee, which has hit a record low of Rs. 95 against the US dollar. Dollar is continuously appreciating against the rupee and the exporters and importers still prefer to keep dollar as their liquidity instead of Yuan which is not tradable in the international market like dollar, pound and euro. Local experts believe that currency swap deal has not lowered the demand of US dollars that exert pressure on the rupee in the market where importers are facing a panic-like situation finding no remedy out of the currency swap agreement.

Some local industry people however believe that the swap deal could become a liability for the hugely-indebted nation, as China has not been interested in trading in Pakistani currency. The swap arrangement is like a loan where one country gives its currency to another in return for an equal amount of the other country's currency at a later date.

Critics suspect that China will later convert the arrangement into a loan charge mark-up at a rate more than the Shanghai interbank market rate. China expressed little interest in trading in Pakistani currency and earlier refused not only to deal in Pakistani currency but also to buy Pakistan's treasury bills with the swap money. Pakistani importers may still have to pay in Chinese currency despite signing of the swap arrangement.

The currency swap deal encourages companies in the two countries to accept export and import bills in Chinese Yuan. No doubt, the deal would be in the interest of both countries to settle trade flows in their own currencies. The two counties have agreed to increase the bilateral trade to $ 15 billion by 2015. The volume of Sino-Pak bilateral trade was $ 7.4 billion last year, tilted in favor of China. Pakistan's exports to China stood at $ 1.6 billion compared to imports worth $ 5.8 billion, showing a deficit of $ 4.2 billion. The deal is expected to reduce Pakistan's reliance on US dollars, as it enables the two countries to do business in rupee and Yuan. The country may increase trade margins by doing business in rupee and RMB that would also lower transaction costs and the risks related to exchange rates fluctuation.

Some experts fear that using the Pakistani rupee or Yuan as an invoicing currency instead of the US dollar would initially pose new risks to businesses in both countries. Both the currencies of RMB and PKR are not nearly as liquid as the US dollar. The Chinese currency is not really traded outside of China except in a few countries and what to speak of the liquidity of Pakistani PKR.