There is a deep and growing preference among Asian countries to settle trade deals in their local currencies. This follows an acknowledgement by ASEAN leaders that it is high time they reduce dependence on the US dollar and accelerate plans for regional currency cooperation, the likes of which could rival the EU’s eurozone in scale.
The US dollar has typically been used as an intermediary currency between trading partners outside the US. In 2020, 74% of Asia’s exports were billed in dollars. But recent hikes in US Federal Reserve interest rates have appreciated the dollar, making it more expensive to settle trade and prompting emerging economies to favour local currencies instead.
Increasingly, China’s renminbi is becoming more popular as an alternative trading currency. According to some, this is because the renminbi offers better exchange rate stability and higher total returns on investments, particularly for major economies in Asia. China and Brazil recently made headlines this year for agreeing to trade in mutual currencies, abandoning the US dollar as an intermediary currency. In April it was also announced that China and Thailand are exploring the possibility of using yuan-baht for bilateral trade settlements. This adds to China’s existing agreements with Indonesia and Russia, as well as Thailand’s joint scheme with Indonesia, Malaysia, Singapore and the Philippines.
While there has been a lot of discussion about what de-dollarisation might mean for the US, less has been said what Asia stands to gain.
With local currency settlements at the ready, Asian countries are eager to supercharge digital payment connectivity. Thailand, Indonesia, Malaysia, and Singapore recently launched a cross-border QR payment system using their local currencies, with the Philippines soon to join. Managing Director of Singapore’s Central Bank, Ravi Menon, stated the cooperation would give rise to “cheaper, faster, and more transparent cross-border payments.” Such a network will not only facilitate cross-border trade, but also investment, remittances and tourism.
The creation of alternative payment systems has gained a lot more traction since sanctions were placed on Russia’s financial transactions over the war in Ukraine. The sanctions prevented Russian banks from using SWIFT to facilitate cross-border payments and froze assets held abroad by Russia’s central bank. In response, ASEAN economies signalled their concern about the geopolitical repercussions such a precedent could spell for them, with Indonesia going as far as to introduce its own domestic payment system. One emerging alternative is the Cross-Border Interbank Payment System (CIPS), a payment system backed by China’s central bank that allows participants to transact in cross-border renminbi payments. Although fairly new and still reliant on SWIFT for messaging, 1,280 financial institutions in 103 countries and regions have joined so far. As more banks in Asia join the CIPS, it may end up being a viable alternative to existing financial institutions.
Pretty soon, Thailand, Indonesia, Malaysia, Philippines and Singapore expect to expand payment connectivity with other Asian countries and regional clusters around the world. They even seek to one day go truly global – bringing the same type of structure to real-time bank transfers and central bank digital currencies while still maintaining a stable, reliable and secure payments system. Although it is difficult to know if the full vision will come to fruition, it will be interesting to see how other countries rise to the opportunity.
Nadia Maunsell is a recent graduate with a Bachelor of International Studies/Media at the University of New South Wales, where she majored in Communications and Journalism. She completed a three-month long overseas academic exchange at Universidad Carlos III de Madrid in Spain. Nadia was awarded a Westpac Asian Exchange Scholarship to complete a second overseas academic exchange for six months at the National University of Singapore. She has previously worked as the Managing Editor of her university’s student newspaper and has had her work published in a variety of publications, including Politik, SBS Voices and Sydney Review of Books. Currently, she works as a Research and Content Analyst for a financial education start-up. Her main areas of interest include Australia-China relations and wider Asia-Pacific trade and development.
Nadia is an intern with the Australian Institute of International Affairs NSW.