Currency swap deal would benefit China and India

By Global Times

Illustration: Liu Rui/GT

China has stepped up the process of yuan internationalization in the last decade. China’s fast economic growth and rapid globalization in recent decades have increased its influence in the world economy. As China has surpassed every other developing nation by a distance to become the world’s second-largest economy, the internationalization of the yuan has become a matter of paramount importance for the country’s policymakers. Yuan internationalization refers to expanding the role of the currency in the international monetary system and increasing its weight in current account transactions, capital account transactions and foreign reserve holdings. Skeptics still believe that the yuan is a long way from international “safe haven” status, and that as an international reserve currency it has gained only a small amount of traction in the last decade. Moreover, the yuan is still not a fully convertible currency, which is one of the important factors for building economic trust. So Chinese policymakers are taking gradual steps toward getting the yuan to be recognized as one of the world’s main reserve currencies.

Policymakers have taken concrete steps to make the yuan a vehicle currency for settlement of trading and to mitigate dollar funding risk by signing bilateral currency swap deals with more than 30 countries. As China’s share of international exports is 13 percent and its share of trade with its Asian partners is 50 percent, yuan invoicing of trade flows has helped not only to reduce trading costs but also to increase the status of the yuan as a currency. On the capital account transaction front, China has liberalized the rules that regulate the participation of financial institutions in its massive bond market. The new bond connect scheme allows large financial institutions to buy and sell Chinese mainland bonds through offshore accounts in Hong Kong. In the long run, the greater participation of financial institutions in Chinese financial assets will increase the usage of the yuan and thus aid efforts to internationalize the currency.

Geopolitical considerations have pushed India to consider the possibility of the rupee’s internationalization. India has also signed several currency swap deals with other central banks in pursuit of the same objective. But these currency swap agreements primarily serve the purpose of mitigating dollar funding risks to protect the economy from currency shocks. As India has a current account deficit with less than a 2 percent share of international exports, and a forex turnover lingering in the lower bottom half among emerging market currencies, internationalization of the rupee has a long way to go. In my view, India and China should enter a currency swap arrangement. At first glance, entering a currency swap arrangement with China may be a little uncomfortable for New Delhi, but it would benefit yuan internationalization and could bring strategic advantages for India. A currency swap agreement between the two countries would not only help both of them achieve their individual goals but also collective ones too.

As India is expected to be one of the world’s fastest-growing economies in the next decade, its demand for energy and raw materials is likely to increase quickly. India is the third-largest importer of crude oil and the Indian market is expected to surpass China as the largest growth market for energy in volume terms by 2030. China is striving to make the yuan an invoicing currency for the oil trade. If India uses the yuan rather than the US dollar in its oil trade, it will help China’s yuan internationalization and India could cut its costs.

The signing of a currency swap with China would certainly dilute India’s rupee internationalization efforts. In return, India could demand a larger share of Chinese outbound consumption. It might also be possible to boost China’s outbound tourism to India, which would not only help India to earn valuable extra forex, but would also help it to generate jobs in the services sector.

China and India should also collaborate in the fields of space exploration, solar energy and artificial intelligence as this would help both of these huge economies to decouple from the whims and interests of powerful Western economies. Asia is poised to once again become the torch bearer to lead the world economy into the future. Collaboration between India and China could lead to faster world growth and to the benefits reaching more of the world’s population.

This article provided by NewsEdge.