PETALING JAYA: In a landmark move, Malaysia and China have agreed to set up a yuan clearing bank here to facilitate and reduce the cost of doing business in the country.
With this agreement, Malaysia will be the second country after Singapore in the Asean region to establish a yuan-clearing bank with China.
Yesterday, Bank Negara inked a memorandum of understanding (MoU) with the People’s Bank of China (PBoC) in Beijing to establish yuan clearing arrangements in Malaysia.
Prior to this agreement, a conversion of the ringgit into yuan would need to be first converted into the US dollar and then thereafter to the yuan, also known as renminbi or RMB. With a clearing house in Malaysia, the ringgit can be directly converted to yuan, hence reducing the cost of transaction.
Bank Negara said the designation of a yuan clearing bank for Malaysia, the first in emerging economies in Asia outside China, was an important recognition of the country’s role as a key yuan offshore centre.
“The presence of a yuan clearing bank will allow Malaysian financial institutions to offer competitive yuan cost to facilitate corporations in obtaining cost effective yuan trade and investments, financing as well as for hedging activities,” the central bank said in a statement.
Prime Minister Datuk Seri Najib Tun Razak said the establishment of the yuan clearing bank resulted from discussion between Chinese President Xi Jinping and himself in May this year.
“It will be a catalyst to support the rapid growth in bilateral trade, investment and financial flows between Malaysia and China,” he said in a statement yesterday after attending bilateral meetings with Xi and Chinese Premier Li Keqiang on the sidelines of the Asia-Pacific Economic Cooperation (Apec) meetings in Beijing.
Najib pointed out that the bank would become a strategic component in Malaysia’s financial system and infrastructure, enabling a significant pooling of yuan liquidity to meet the financing needs of Malaysian financial institutions and businesses.
“I am confident that Malaysian financial institutions will be able to utilise this advantage to pursue greater use of yuan to facilitate greater regional trade and investment in their extensive regional network in Asean, thus strengthening Malaysia’s position as a gateway for RMB to flow into the Asean region,” he said.
Najib added that the Chinese government had informed him that the Chinese bank chosen for this initiative would be announced in the nearest future.
The yuan clearing house is the latest in a series of moves that both countries have undertaken to enhance trade that has grown more than 10-fold since 2000 to exceed US$100bil (RM332.85bil) in 2013. China is Malaysia’s largest trading partner and Malaysia is China’s largest trading partner in Asean.
In May this year, during the 40th anniversary of the establishment of diplomatic relations between the two countries, Malaysia and China agreed to work towards the realisation of bilateral trade target of US$160bil (RM532.56bil) by 2017.
Other measures taken previously to enhance the ringgit-yuan trade include:
● Bank Negara being the first central bank in Asean to establish a yuan-swap line with PBoC amounting to 80 billion yuan in 2009. The size of the swap line increased to 180 billion yuan in 2012;
● Bank Negara being awarded a Qualified Foreign Institutional Investor (QFII) licence to invest in China’s onshore market and granted access to the country’s interbank bond market. The QFII quota currently stands at US$1.5bil, the highest granted to a foreign entity outside China;
● In 2010, the ringgit was the first emerging market currency to be traded in the China Foreign Exchange Trade System; and
● A cross-border collateral arrangement was established in November 2013 between Bank Negara and PBoC to enable the use of home currency collateral in the form of securities or cash to obtain liquidity from the host country.
Based on the Society for the Worldwide Interbank Financial Telecommunication (SWIFT) data, the total yuan clearing amount in Malaysia hit 1.15 trillion in the first half of 2014, up 104.5% from 2013.
The SWIFT RMB Tracker report dated July 2014 also ranked Malaysia as one of top 10 offshore yuan centres in the world. The trade settlement volume has also tripled since 2010 to RM3bil in 2013 while yuan deposits in Malaysia have also expanded by over 10-fold to the current 10.7 billion yuan since 2010.