As part of its efforts to lessen the effect of US dollar volatility on Thai firms, the Bank of Thailand (BOT) intends to relax the regulations governing the use of the Chinese yuan for trade settlement with China.The US dollar has experienced considerable fluctuations over the past year, which have had an impact on commerce and the world economy. To lessen reliance on the dollar and to reduce the risk associated with exchange rate fluctuations, the Thai central bank aims to encourage yuan-baht trade settlement.
To lessen the effects of currency volatility and encourage the use of the yuan for trade, investment, and tourism activity between China and Thailand, regulations restricting yuan-baht trade payments are anticipated to be lifted. To encourage the use of local currencies in bilateral trade settlement and direct investment, the Bank of Thailand has created local currency settlement frameworks with Asian and Asean central banks. To avoid becoming overly dependent on one currency and to encourage international trade.
Thai businesses need more options for currency settlement. bilateral exchange of currencies In 2020, the BOT and the People’s Bank of China (PBOC) inked a bilateral currency swap arrangement (BSA), which permits the exchange of up to 70 billion yuan or 370 billion baht over the course of five years.
According to BOT governor Sethaput Suthiwartnarueput. The BSA is intended to support trade and investment in local currencies, strengthen bilateral financial cooperation, and boost confidence among the private sector in using local currencies for cross-border operations.
Yuan-baht settlement is still infrequent, making up only 2.26% of all foreign trade transactions in Thailand in 2021. The BOT and PBOC are in discussions about how to encourage the use of the yuan, and this year, the BOT anticipates relaxing certain restrictions on the yuan’s use in trade, investment, and tourism. Cross-Border Settlements in Yuan are increasing.
According to a central bank report, the yuan gained traction globally in 2021, with cross-border yuan settlements increasing by 29% in value over the previous year. The growing cross-border use of the yuan implies that China is succeeding in its years-long effort to promote the use of the currency abroad.
Particularly through its own Cross-Border Interbank Payment System (CIPS). According to the People’s Bank of China (PBOC), cross-border yuan settlements increased to 36.61 trillion yuan ($5.12 trillion) last year, made up of 18.51 trillion yuan in receipts and 18.1 trillion yuan in payments.
With a trade value of US$105 billion in 2021, or 17.9% of Thailand’s total trade value, China will continue to be Thailand’s greatest trading partner. China is another important supplier of travelers for Thailand, and more Chinese tourists are anticipated there in the second half of 2023.
The BOT thinks that encouraging yuan-baht settlement will strengthen trade and economic links between Thailand and China while reducing foreign exchange risk in the face of continued US dollar fluctuations. The dollar is unstable, why?
The US dollar is the reserve currency of the world, meaning that central banks hold it as part of their foreign exchange reserves and use it frequently for international transactions. The dollar’s value in relation to other currencies is influenced by supply and demand. The US dollar index, which gauges the value of the dollar against a basket of six important currencies, increased by 8.8% between March 9 and March 20, 2020, according to the Bank for International Settlements (BIS), as investors sought safe-haven assets amid the market turbulence.
But from March 20, 2020 to January 6, 2021, the index dropped by 12.5% as the US Federal Reserve lowered interest rates to almost zero and increased its asset purchase program, undermining the dollar’s appeal. Between January 6 and March 31, 2021, the index increased by 4.3% as the US economy began to show signs of recovery and inflation expectations increased, increasing the likelihood that monetary policy would tighten.
The index did, however, experience a 3.7% decrease from March 31 to May 24, 2021, as other economies and the Fed maintained more dovish positions. How is Thailand affected by the fluctuating dollar? Thailand’s economy is open and strongly dependent on exports and tourism to prosper.
The competitiveness of Thailand’s exports, its foreign exchange reserves, its external debt, and its inflation can all be significantly impacted by the dollar’s volatility. Through two different channels—import prices and domestic demand—dollar volatility can also have an impact on Thailand’s inflation rate. Lower import costs and fewer inflationary pressures from imported products and services are possible with a higher baht.
A lower baht, however, can result in higher import costs and more pressure for inflation from imported products and services. A stronger baht can also reduce domestic demand by lowering baht-per-dollar receipts from tourism and exports. However, a depreciating baht might increase export revenue and tourism receipts, which will raise domestic demand. What steps have been taken to reduce dollar volatility?
Reducing exposure to currency rate risk, minimizing transaction costs, boosting trade efficiency and competitiveness, and promoting financial cooperation between Thailand and China are all advantages of employing yuan-baht trade settlement. Using yuan-baht trade settlement presents a number of difficulties, including limited yuan liquidity availability and accessibility in Thailand’s financial system, a lack of knowledge and understanding of yuan-baht trade settlement among Thai businesses, regulatory obstacles and practical difficulties with cross-border payments, and uncertainty.
China’s exchange rate policy and capital controls. The BOT has been putting various strategies into action to address these issues, including establishing a bilateral currency swap agreement with China, giving banks access to yuan liquidity, creating a yuan payment infrastructure, launching public awareness campaigns, facilitating regulatory coordination, and promoting market growth.
