China wants to use its Yuan as financing currency instead of the US dollar for projects to be funded under preferential buyer's credit (PBC) to skip forex complications.
The Export-Import (Exim) Bank of China has proposed to Bangladesh that it wants to finance the PBC- funded projects partly or fully with Yuan amid severe fluctuation in the dollar rate that nearly emptied many countries' forex reserves.
In a recent letter to the Economic Relations Division, LI Qinxi, a general manager of the Chinese bank, wrote that the bank had successfully financed a batch of projects under PBC and governmental concessional -loan (GCL) facility which generated good social and economic benefits.
He said the PBC loan comprises the major portion of them and there was still potential for bilateral cooperation with the PBC facility.
"However, in view of the current significant fluctuations in the US dollar exchange rate accompanied with the interest-rate-benchmark hike by the Federal Reserve, both sides are bearing significant risks such as high financing cost, exchange-rate risk etc," the letter read.
The rising cost for the USD in the market may also lead to interest-rate increase for the following PBC- financed projects, he wrote.
Using Yuan as the financing currency could distract the risk borne by the fluctuation in USD exchange rate as well as interest rate and relieve stress stemming from the shortage of USD.
The Yuan financing could reduce the exchange- rate cost, which, therefore, could provide a favourable position to reduce the total investment for implementing the project.
Bangladesh recently opted to make transactions with China using Yuan amid severe shortage of US dollars.
To this effect, the Bangladesh Bank in last September allowed the authorized dealer banks (ADs) to carry out transactions in Yuan for trade with China alongside the dollar.
The central bank in its order said: "To bring a wider scope, it has been decided that ADs may maintain accounts in Yuan with their correspondents/branches abroad for settlement of cross-border transactions executed in this currency."
Last year's order followed another order issued in 2018 which allowed the dealer banks to open foreign- currency clearing accounts with Bangladesh Bank in the Chinese currency.
China, in recent times, has been building an alternative payments system called 'cross-border inter-bank payments system (CIPS)'.
Bangladesh earns around $1 billion by exporting goods to China while imports from the vast economy are worth $15 billion annually.
