Local currencies expected to strengthen Asian economies’ resilience

Jakarta (Indonesia Window) – Governor of the People’s Bank of China (PBOC) Yi Gang has said the implementation of Local Currency Settlement (LCS) would strengthen the resilience of the Asian economies and dissipate the negative effects of developed country policies during the recovery period.

“Developing markets should increase their resilience. This is where regional financial cooperation plays a key role,” he said at a meeting on the agenda of the G20 Indonesia Presidency here on Wednesday (Feb. 16).

Yi Gang noted some substantial progresses so far in using local currencies for regional trade and investment, making Asian economies more resilient to external shocks.

According to him, a currency exchange helps improve the global financial safety net so that it becomes a useful supplement to the international monetary system.

To date, the bilateral currency exchange among the ASEAN+3 countries has reached around 380 billion U.S. dollars, thus becoming a back stop for regional monetary and financial stability.

In addition, a currency exchange helps facilitate bilateral trade and investment as China has signed currency exchange agreements with many Asian economies in response to the increasing demand.

“This exchange agreement has facilitated cross-border trade and investment,” he said.

Meanwhile, in January 2022, the PBOC and Bank Indonesia renewed the currency exchange agreement and expanded its size from 31 billion dollars to 39 billion dollars.

Since 2016, Thailand, Malaysia, Indonesia, the Philippines and Japan have established bilateral Local Currency Settlement Frameworks (LCSF), with some of these countries expanding the scope of the framework from trade to direct investment.

Asia also passed the LCSF general guidelines in 2019 and pushed for its implementation, while China and Indonesia in September 2021 officially agreed to the LCSF and launched regional direct trades.

Yi Gang said that LCSF has positive impacts such as reducing exchange risk and currency exchange fees, increasing efficiency in the use of local currency and facilitating direct quotes between currency swaps.

Not only does it expand the use of local currencies in trade and investment, but also advance bilateral trade and economic cooperation, he said.

Yi Gang continued, the PBOC has been working to improve supporting measures and reduce cross-border restrictions on the use of local currencies.

Some of these efforts include establishing cooperation between China UnionPay and Indonesian banks and other payment service providers, providing quality payment services, and promoting the use of local currencies between the two countries.

“In the near future, China is ready to work closely with Indonesia and other Asian economies to promote the use of local currencies in regional trade and investment,” he stressed.

Reporting by Indonesia Window