Financial links with China set to strengthen through further cross-border adoption of the currency
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The financial cooperation between China and the Association of Southeast Asian Nations is an important part of Asian financial cooperation. In recent years, this cooperation has been built on a more solid foundation with economic and trade ties between China and ASEAN becoming ever closer.
The Chinese mainland’s investment in the 10 ASEAN countries reached $19.73 billion in 2021, accounting for 15.4 percent of its investment in Asia, and 73 percent of the country’s investment outside the Hong Kong Special Administrative Region, according to data released by the Ministry of Commerce. Some seventy-two ASEAN financial institutions have been certified as Qualified Foreign Institutional Investors in China.
The use of the renminbi in cross-border settlements between China and ASEAN countries totaled 4.8 trillion yuan ($694.4 billion) in 2021, a year-on-year increase of 16 percent and an increase of nearly 20 times over the past decade.
The People’s Bank of China, China’s central bank, has signed bilateral local currency swap agreements with the central banks of Indonesia, Malaysia, Thailand, Singapore and Laos. The PBOC and Bank Indonesia have also launched a framework for local currency settlement.
The Cross-Border Interbank Payment System, which specializes in renminbi cross-border payment clearing, and branches of Chinese banks have achieved full coverage in the 10 ASEAN countries.
As for regional financial cooperation, the amended Chiang Mai Initiative Multilateralization Agreement came into effect in March 2021. The financial cooperation within the framework of ASEAN+3 — the 10 ASEAN members plus China, Japan and South Korea — has been given the impetus for further upgrading.
Financial cooperation between China and ASEAN is embracing new opportunities.
First, new economic and trade relations in Asia are being shaped, the regional division of labor in East Asia is being restructured and ASEAN has expanded its market share in labor-intensive products. China, meanwhile, has become an important source of final demand and a provider of intermediate goods with higher added value. This serves as a pillar of financial cooperation in terms of the real economy.
Second, the Regional Comprehensive Economic Partnership is currently the free trade agreement with the highest level of openness related to China’s financial sector, which ushers in greater room and new opportunities for China-ASEAN financial cooperation.
Third, the international influence of the renminbi is increasing, and the framework for cross-border renminbi use has been further improved. Based on our research, the Indonesian rupiah, Philippine peso and Malaysian ringgit are closely related to renminbi fluctuations. The renminbi is the second most influential currency in the ASEAN region, after only the US dollar and significantly higher than the euro and the yen.
Fourth, the blossoming of new sectors and new business models in the region, including in the digital economy and green economy, will usher in new opportunities for cooperation.
The degree of regional integration in trade, investment and value chains in the Asia-Pacific region has reached a relatively high level, and the level of connectivity in science and technology has shown a level of potential, which can also become a focal point for financial cooperation. Going forward, there is still much room for the development of financial cooperation between China and ASEAN.
First, the two sides should further improve the level of the regional financial safety net. Amid the rising demand for heightened regional financial cooperation, China and ASEAN should strengthen regional financial cooperation under the ASEAN+3 framework, promote the upgrading of the Chiang Mai Initiative Multilateralization agreement from committed investment to actual investment, and scale up the funding of the agreement.
In doing so, the two sides can establish a fund with a legal status that can better serve as the regional financial safety net. In addition to responding to liquidity issues, the two sides can explore the establishment of a regional fund in the form of local currency contributions to promote regional financial safety and sustainable economic growth.
Second, the two sides should jointly promote the development of an Asian bond market and actively push forward cooperation in capital markets. One consensus on the building of an Asian bond market in the past was that the excessive foreign exchange reserves in East Asian countries mirrored the outflows of savings and failed to support the economic and financial development of the region.
Since the Ukraine conflict in 2022, the risk of international financial sanctions has increased. It is of higher significance to strengthen the construction of the Asian common bond market, especially with China’s onshore market as an important component.
It is important to continue promoting the two-way opening of the bond market, attracting high-quality sources from ASEAN countries to issue panda bonds in the Chinese market, and further building up Asian bond markets. In addition, the cooperation between China and ASEAN in the capital market should be moved forward.
Third, China and ASEAN should further enhance the level of financial cooperation based on the RCEP and other economic and trade agreements. It is important to promote regional investment cooperation and beef up cooperation in the upstream and downstream of industry chains in trade and the digital economy.
Special attention should be paid to strengthening cooperation in the field of financial technology based on the regional strengths in regional science and technology and enabling the financial sector to play a bigger role in supporting digital economic models such as cross-border e-commerce and trade and ESG (environmental, social and governance) industries.
The goal is to enable the sector to better facilitate regional value chain adjustments and enable the formation of an Asian value chain with a more reasonable division of labor. The monetary and financial cooperation mechanism between China and ASEAN should be improved continuously to facilitate trade and investment and to expand the use of local currencies in the region.
Finally, cross-border use of the renminbi should be promoted based on the flow of people. There were about 200,000 Vietnamese migrant workers in the Guangxi Zhuang autonomous region before the pandemic. However, many migrant workers do not have work visas and only work in Guangxi with a certificate, which means that they cannot open bank accounts and their employers can only pay their wages with cash.
Yang Panpan is a research fellow and the deputy head of the department of international finance at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and a research fellow at the National Institute for Global Strategy at the CASS. Xu Qiyuan is a senior fellow and the deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and a senior fellow at the National Institute for Global Strategy at the CASS. The authors contributed this article to China Watch, a think tank powered by China Daily.
The views do not necessarily reflect those of China Daily.