Ramifications of replacing Yuan to US dollar


By Manzoor Ahmed
The latest report from Islamabad hints that Pakistan Government will allow Chinese currency Yuan to replace from US dollar in some areas particularly in Gwadar. If there was ever a clearer signal that China is all set to take over Pakistan at least economically, it was when the Chinese wanted the Yuan to become official currency in the port town of Gwadar. While the Pakistan government has officially turned down the request, it is notable that on social media, a large number of local people in Gwadar have welcomed the Chinese proposal and say that using the Yuan would at least help them do business. Interesting thought at this point when under the Long Term Development Plan that the Chinese had created for Pakistan under the China Pakistan Economic Corridor (CPEC) the idea was to enter into a currency swap agreement with Pakistan. The current proposal was made under this overall pact with the aim of starting the usage of Yuan in Gwadar where a large number of Chinese are present, and China hopes that trading will eventually start in the free trade zone.
Officially, Pakistan (until now) has refused to allow the free use of the Chinese Yuan on the lines of the US dollar after officials from Pakistan and China met to finalise the Long-Term Developmental Plan under the US$ 50 billion CPEC. Senior officials from Pakistan and China have decided to go ahead with the Gwadar development plan despite hurdles and lack of finance for at least three Special Economic Industrial Zones and some important rail, electricity and road projects. Pakistani newspaper Dawn reports that Pakistan was not ready to allow the Chinese Yuan (Renminbi) to be freely used in Gwadar or that it be treated on par with the US dollar in Pakistan. The Pakistani position was that the use of Yuan for common use in any part of Pakistan or for it to exchangeable like the US dollar had to be on a reciprocal basis.
The context for the discussions on the Yuan usage in Gwadar was that of meeting that a visiting Chinese delegation had with its Pakistani counterparts for the Seventh Joint Cooperation Committee (JCC) meeting to finalise the Long Term Plan (LTP) for CPEC. The JCC meeting also saw finalization of the LTP on 21st November 2017 details of which have not been made public yet. The LTP proposed to make the Yuan a legal tender in Gwadar port, not in rest of Pakistan, as part of its priority to make Yuan a global currency through Yuan-denominated bonds and currency swap arrangements between the Central Bank of China and other countries. Even Pakistan too has such a swap arrangement with other countries for quite some time now.
Reports indicate that Pakistan had opposed the Chinese demand twice earlier but Chinese continued to be persistent and raised the issue a third time at the last JCC meeting. The public discourse on outcome of the JCC meeting shows a contradiction in Pakistan’s issue on the matter of Yuan usage in Gwadar. According to the Secretary, Planning Department of the government of Pakistan the Chinese demand was turned down, while Planning Minister Ahsan Iqbal claimed that the demand was still being considered. The only conclusion one can draw is that is has been turned down for the time being and will be considered at a later date!
The challenge for Pakistan is that it continues to deal with China on the CPEC, but has had to conceal information on sensitive issues like making the Yuan legal tender as it affects sovereignty. The Chinese involvement in Gwadar is a case in point. China first showed interest in having energy pipelines run from Gwadar to China via the Himalayas as early as 2006, which years later became the CPEC under President Xi Jinping’s Belt and Road Initiative. The Chinese soon built a small harbour at Gwadar to bring machinery, equipment and materials for constructing a proper port while the management and development of other facilities was given to a Singaporean Company. Subsequently, even the management of the port was handed over to the Chinese. CPEC added rail and road connections to the energy lines projecting it as a grand plan for overall economic and industrial development of Pakistan. According to the China’s NDRC document outlining the LTP for Pakistan, Gwadar, “is positioned as the direct hinterland connecting Balochistan and Afghanistan.” As a CPEC entreport, the plan recommends that it be built into “a base of heavy and chemical industries, such as iron and steel/petrochemical”. It notes that “some Chinese enterprises have started investment and construction in Gwadar” taking advantage of its “superior geographical position and cheap shipping costs to import crude oil from the Middle East, iron ore and coking coal resources from South Africa and New Zealand” for onward supply to the local market “as well as South Asia and Middle East after processing at port.” A glance at social media indicates that there is support for the Chinese proposal in some quarters. If the Yuan is permitted to be used as legal tender in Gwadar, it will enable Chinese residents and workers to use their currency freely anywhere in Gwadar and help them pay Pakistani shop keepers and save on paying the exchange charges. Also, payments from one Chinese company to another won’t be in foreign currency and will help save foreign reserves. For the Chinese, the greatest benefit of having the Yuan as legal tender in Gwadar as perhaps eventually in all of Pakistan will be that all the earnings from CPEC can easily be repatriated back to China avoiding fluctuations/risks of foreign currency.
The IMF had warned in its review of Pakistan’s economy last year that once Chinese companies start making profits, they would begin to repatriate it back to China. If the transaction was done in Yuan then it would benefit the Chinese more than the Pakistanis. A perusal of the global market indicates that only two countries thus far have officially allowed the Yuan to be legal tender, Angola and Zimbabwe. Zimbabwe’s decision was aided by the collapse of its own currency in 2009, and they shifted to the US dollar and the South African Rand as legal tender, and added Yuan in 2015.
This was achieved after China cancelled Zimbabwe’s US$ 40 million debt. China’s LTP for Pakistan is aimed precisely at eroding absolute sovereignty over strategic ports like Gwadar. At the end of the day, the CPEC is of Chinese origin, is being built by China and will meet China’s own interests; Pakistan is incidental in the whole scheme of things. That is why the Yuan battle is a long story that will not end easily today or tomorrow.