Southeast Asia's Growing Interest in Non-dollar Financial Channels—and the Renminbi's Potential Role – Carnegie Endowment for International Peace

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In late June, the People’s Bank of China (PBOC)—China’s central bank—announced the launch of a new emergency liquidity arrangement that can be funded using renminbi and tapped by participating central banks during times of market stress. Three of the five participating central banks are Singapore’s, Malaysia’s, and Indonesia’s, which each recently renewed agreements with the PBOC implicitly aimed at reducing dollar usage in cross-border payments. This follows policymakers in Thailand, Laos, Cambodia, and Myanmar all announcing efforts to reduce dollar usage, as well as comments by Indonesia’s central bank head that consumers across five of Southeast Asia’s largest economies will soon be able to make intra-regional cross-border payments via linkages that avoid using the dollar as an intermediary, as is currently often the case. Against this backdrop, some in Beijing are positioning expanding cross-border renminbi financial channels—including the fast-growing Cross-Border Interbank Payment System (CIPS)—as a way for businesses across Southeast Asia to avoid using the dollar.
Several factors are behind the various efforts aimed at reducing dollar usage in Southeast Asia. To begin with, many officials are concerned about the potential economic impacts of U.S. monetary policy tightening on the region given its high usage of the dollar; accordingly, some are seeking to reduce usage of the dollar in intra-regional trade payments as a means of curbing dollar reliance more broadly. Recent sanctions may also be spurring demand for alternative financial channels—for example, Myanmar’s military government is actively exploring how to circumvent EU and U.S. sanctions to transact with Russia. And for years, central bankers in the region have had issues with the inefficiencies of existing systems and processes through which most intra-regional trade and financial transactions flow. Beijing sees an opportunity to leverage these dynamics in order to achieve the PBOC’s goal of expanding the renminbi’s use in cross-border trade and investment.
So will businesses across the region increasingly abandon the dollar for the renminbi or local currency alternatives? The new emergency renminbi liquidity arrangement and other agreements between the PBOC and Southeast Asian central banks will—in the eyes of some researchers at major Chinese banks and think tanks—lead to greater intra-regional renminbi usage and financial integration, although underdeveloped foreign exchange markets remain an obstacle to these ambitions. Importantly, the future of large-value cross-border payments in Southeast Asia and the renminbi’s role depend in part on how Washington responds to efforts aimed at transforming local currency financial infrastructure in the region.
Data indicate that in recent years over 80 percent of outstanding international debt securities in most major Southeast Asian emerging markets have been dollar-denominated. Also, most cross-border trade payments from, to, and within Southeast Asia are invoiced in dollars. For example, according to an Asian Development Bank report, around 80 to 90 percent of exports from most large emerging market economies in Southeast Asia were invoiced in dollars between 2015 and 2020. The dollar’s dominance in Southeast Asian trade payments reinforces its dominance in financial markets and vice versa.
Large-value cross-border dollar payments can flow through the New York–based Clearing House Interbank Payments System (CHIPS), which settled approximately $1.8 trillion in dollar payments daily in 2021, as well as the Clearing House Automated Transfer System (CHATS) in Hong Kong, which settled approximately $50 billion in dollar payments each day. A few Southeast Asian banks are direct dollar clearing participants in CHATS, and only one Southeast Asian bank—a Thai bank—is a participant in CHIPS. Accordingly, Southeast Asia’s intra-regional cross-border dollar payments often must pass through so-called correspondent accounts held by smaller financial institutions at larger banks that are members of CHIPS or CHATS. As explained in a previous Carnegie commentary, this intermediation creates costs. Additionally, although the extent of Washington’s authority over payments made via CHATS is debated, firms that use CHIPS or CHATS to facilitate dollar payments to U.S.-sanctioned entities can be punished and even effectively shut off from dollar access by U.S. authorities; high usage of the dollar inherently strengthens the significance of this capability.
The dollar also plays an important role in Southeast Asia’s foreign exchange markets. Markets for regional currency pairs (for example, rupiah-riel) are generally quite underdeveloped, so conversions of one local currency into another often can take place via separate transactions of each currency against the dollar. Regional experts attribute use of the dollar as a vehicle currency in foreign exchange transactions to its liquidity and stability, which in turn drive relatively lower transaction costs of using the dollar as an intermediary. Because no robust foreign exchange market yet exists for many Southeast Asian currency pairs, data indicate that the gap between buying and selling rates—the bid-ask spread, a measure of transaction cost—for local currency pairs in Asia can be more than double the bid-ask spread for a local currency against the dollar. Globally, over 90 percent of over-the-counter foreign exchange transactions include the dollar on one side of the trade; this high turnover reinforces the dollar’s liquidity and status as a vehicle currency.
Officials in Southeast Asia who are seeking to curb regional reliance on dollar financial channels generally are motivated by one or more of three main reasons. First, some Southeast Asian policymakers believe that curbing their country’s high dependence on the dollar will reduce vulnerability to economic shocks—particularly currency depreciation and volatile capital flows—as U.S. monetary policy tightens. Second, Washington’s use of sanctions—which as noted above are powerfully consequential due to dollar dominance—is criticized by some in the region; for example, Cambodian and Laotian leaders have implicitly disagreed with Washington’s use of sanctions against Russian entities in response to the war in Ukraine. Third, and more generally, senior central bank officials in Southeast Asia critique the highly intermediated process by which large-value cross-border payments are facilitated, and are working to create intra-regional solutions.
Which of these motivations matters most to national policymakers varies across countries in Southeast Asia. Data suggest, however, that slowly but surely, Southeast Asia is reducing dollar usage. While approximately 80 percent of East and Southeast Asian exports were invoiced in dollars in 2019, this figure was down from closer to 90 percent in much of the early 2000s through mid-2010s. Recent policy initiatives aim to accelerate that decline.
Between 2016 and 2019, the central banks of Thailand, Indonesia, Malaysia, and the Philippines entered into local currency settlement (LCS) agreements that aim to increase local currency use in trade and investment by fostering more liquid and efficient local currency foreign exchange markets. Under the agreements, certain banks are granted licenses to offer direct trading pairs of local currencies, local currency accounts, and hedging instruments that foster increased local currency usage. Last fall, the banks authorized to conduct such activities—called Appointed Cross-Currency Dealers (ACCDs)—grew to include major global financial firms as more details regarding LCS policy initiatives were agreed upon by regional central banks. The central banks that participate in LCS agreements are seeking to “reduce currency risks arising from volatility of major currencies” such as the dollar.
Two LCS agreements were also recently implemented by Indonesia with each of the region’s largest economies—Japan and China. The agreement with Japan, Indonesia’s second-largest trading partner by export volume, resulted in LCS transactions growing dramatically between 2020 and late 2021. Indonesia’s 2021 LCS agreement with China, its largest trading partner, has led to the creation of a regional interbank rupiah-renminbi marketplace; several major regional banks, including China’s largest state-owned banks, were appointed as ACCDs. Overall, Indonesia aims to increase local currency usage in trade and settlement by 10 percent this year through its various LCS agreements, which data suggest may be an achievable goal.
Indeed, one recent study found that after implementation of the LCS agreement between Thailand and Malaysia began in 2016, the share of Thai exports denominated in baht increased meaningfully (from around 13–15 percent leading up to the start of the agreement’s implementation to around 18 percent in 2019). Also, the share of Malaysia-Indonesia trade facilitated under these countries’ LCS agreement reportedly grew from 1.4 percent in 2018 to 4.1 percent in 2020. However, obstacles to the success of LCS agreements between Southeast Asian countries persist—for most intra-regional currency pairs in Southeast Asia, transaction costs are still high relative to the dollar, and markets for direct currency exchange pairs and related hedging instruments remain underdeveloped. Moreover, as examined in other Carnegie research, businesses in emerging markets can often face limited access to dominant commercial cross-border payments channels.
These dynamics underscore the importance of PBOC Governor Yi Gang’s pledge at the February 2022 G20 Finance Ministers and Central Bank Governors meeting to support increased local currency usage in Asia. Core to Beijing’s efforts to play an important role in reducing dollar usage in intra-Asian cross-border payments are China’s state-owned banks. In recent years, these banks have launched affiliates across Southeast Asia that offer foreign exchange services and renminbi accounts for local firms as well as renminbi correspondent accounts for local banks. Together, the PBOC and Chinese state-owned banks are encouraging Chinese companies to invoice more trade in renminbi, working to develop foreign exchange markets for renminbi pairs with Southeast Asian currencies, and supporting the utilization of the renminbi in Southeast Asian economies.
Some PBOC and state-owned bank officials ultimately envision the renminbi potentially replacing the dollar as Asia’s dominant currency. Critical to such an outcome is CIPS, Beijing’s relatively new large-value renminbi payments system. CIPS was launched in 2015 but through 2017 was reportedly minimally used; across these years it cumulatively processed only about one-quarter of its 2021 renminbi transaction volume of ¥79.6 trillion (approximately $11.7 trillion). Before the growth of CIPS, renminbi cross-border transactions were largely facilitated by the China National Advanced Payment System (CNAPS) through payments made by Chinese banks acting on behalf of overseas banks. This model generally relies on non-Chinese banks sending payment messages via the Society for Worldwide Interbank Financial Telecommunication (SWIFT)—an EU-based messaging system used for most large-value cross-border payments—to Chinese banks with which they have an account. Converting those messages to the format used by CNAPS is reportedly a time-consuming and error-prone process, and because CNAPS was built for domestic use, its operating hours are limited to business hours in China.
Although CIPS technically relies upon CNAPS to settle transactions, it addresses these issues by being fully compatible with SWIFT messages and operating twenty-four hours a day, five days a week (fully overlapping with all four of Southeast Asia’s time zones). The system can facilitate cross-border renminbi transactions faster than arrangements reliant on CNAPS and has over seventy “direct participants”—meaning financial institutions that maintain an account with CIPS, including the Chinese affiliates of several major U.S., European, and Japanese banking groups with offices across Southeast Asia. These banking groups can more efficiently facilitate renminbi-denominated trade by using CIPS, but to do so can often involve using SWIFT, as CIPS indirect participants—such as the Southeast Asian affiliates of large non-Chinese banking groups—still generally use SWIFT to send payment instructions to the system’s direct participants. Yet as the EU’s reaction to the war in Ukraine shows, SWIFT can be shut off to banks for strategic reasons.
On the other hand, Malaysia, Philippines, Singapore, and Thailand affiliates of Chinese state-owned banks are direct CIPS members, meaning firms banked by these institutions can transact with entities banked by CIPS direct participants without using SWIFT. This functionality, although reportedly currently limited in use, may help explain why Russia’s VTB Bank—recently barred from SWIFT—has said it is applying to be a direct CIPS participant even though it is already a CNAPS participant. CIPS could in theory enable Southeast Asian firms to make renminbi payments with relative ease to entities banked by large Russian financial institutions like VTB Bank that have been cut off from SWIFT.
Last month, CIPS’s average daily transaction volume grew to approximately ¥370 billion (around $55 billion)—about the same as the 2021 average daily volume of CHATS dollar payments. To achieve even greater renminbi overseas use, prominent voices at major Chinese state-owned banks are calling for Beijing to implement a number of reforms to foreign exchange markets, including reducing limitations on the renminbi’s convertibility and increasing foreign participation in China’s currency markets. On the other hand, commentary by the chief economist at one large Chinese state-backed financial firm suggests that some in Beijing believe that the renminbi can still evolve into a regional currency without Beijing’s needing to greatly liberalize these restrictions. Instead, regional frustrations with the dollar—this line of thinking goes—could drive Asia to increasingly use controlled but growing offshore renminbi channels accessible via state-owned banks, LCS agreements, and CIPS.
One key question for policymakers concerned about such an outcome is how Southeast Asia’s central bankers could respond to continued local currency depreciation in the region and, relatedly, tightening U.S. monetary policy. Could steps taken by policymakers across the region in response to market volatility put Southeast Asia on a path toward a more multipolar currency paradigm, or instead toward becoming a region anchored around the renminbi, as some Chinese officials envision? To what extent will the dollar remain dominant?
In June, one scholar at a Chinese state-backed think tank wrote that increasing geopolitical tensions and market stress will provide the PBOC opportunities to expand bilateral central bank renminbi swap lines across Asia. These arrangements, signed by the PBOC with many of Southeast Asia’s central banks, allow central banks to exchange local currency with the PBOC for renminbi with the aim of promoting renminbi and other local currency usage in cross-border trade and reducing foreign exchange rate volatility. These arrangements can be tapped by central banks to help them respond to currency crises—a situation that some Southeast Asian economies may soon be in. Research suggests that expanded PBOC swap lines with central banks across the region could lead to increases in the share of cross-border trade invoiced in renminbi. Those who do not find a causal effect of swap lines on renminbi usage nevertheless conclude that these arrangements can be leveraged to grow Beijing’s global economic influence.
Chinese state-owned bank researchers reportedly believe that the PBOC’s new Renminbi Liquidity Arrangement, which was announced in late June and involves the central banks of Indonesia, Malaysia, and Singapore, is similarly conducive to increasing renminbi usage as well as China’s economic influence in Asia. This new arrangement is more flexible than swap lines, seemingly allowing for a participating central bank to pledge a range of “qualified collateral” from its balance sheet for a sizable renminbi injection. Some researchers in China believe that greater regional renminbi usage will also be fostered by 2021 adjustments to the Chiang Mai Initiative Multilateralization (CMIM)—a multilateral swap arrangement involving Association of Southeast Asian Nations members, South Korea, China, and Japan—allowing for local currency (rather than dollar) emergency liquidity support for participating central banks.
Whether the CMIM, the Renminbi Liquidity Arrangement, or the PBOC’s swap lines can be used to advance Beijing’s objectives amid financial market volatility, and the extent to which the renminbi grows in use across Southeast Asia, are not yet certain. What happens in the years ahead depends on what actions policymakers of other Asian nations take to improve the attractiveness of local currency usage, and also in part on how Washington reacts to their concerns regarding high reliance on the dollar, lack of access in emerging markets to dominant financial channels, and U.S. monetary policy tightening.
U.S. policymakers should expeditiously work with regional allies to shape policy aimed at addressing these concerns and the growth of LCS initiatives in ways that are tailored to both U.S. interests and particular country-specific concerns. Washington’s engagement with Thailand and Japan on these issues is especially critical, given the relatively higher share of regional cross-border commerce conducted with these countries’ currencies as well as their participation in efforts to bolster local currency settlement in ways that do not necessarily align with the renminbi evolving into a dominant regional currency. Washington should also take note that Vietnam and the Philippines are the two major Southeast Asian economies without live bilateral central bank renminbi swap lines; and given Vietnam’s relatively close commercial and security ties with Russia, the Vietnamese government may increasingly explore non-dollar payment channels.
Additionally, it is critical for U.S. policymakers to focus on the impacts to U.S. interests of new technologies and policy approaches evolving in response to the operational limitations of incumbent financial channels in Southeast Asia. In particular, as central banks in Southeast Asia’s five biggest economies (Indonesia, Singapore, Thailand, the Philippines, and Vietnam) research or experiment with central bank digital currency (CBDC), Washington and local U.S. allies must consider how to respond to likely efforts by Beijing to increasingly influence regional CBDC standards—notably, the PBOC is formally leading efforts to build architecture for CBDC interoperability as part of a multi-CBDC project that counts Thailand’s central bank as a member. Monitoring how the growing formalization of cryptocurrency usage in Southeast Asia (such as in Myanmar, where it is supported by the National Unity Government, and Cambodia) could impact the evolution of regional financial market infrastructure is also important. Finally, U.S. policymakers should continue to examine how to foster innovation that enhances the international attractiveness of large-value cross-border dollar payments channels.
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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