Regulations have limited growth of yuan-baht trade payment even as the central banks of Thailand and China have encouraged local currency settlement for quite some time.
Regulators are preparing to relax rules on using yuan for yuan-baht trade transactions as US dollar volatility increases compared with other currencies worldwide.
What is the current state of local currency settlement agreements?
The Bank of Thailand, in collaboration with Asian and Asean central banks, has implemented local currency settlement frameworks to promote the use of local currencies in bilateral trade settlement and direct investment.
Bank of Thailand governor Sethaput Suthiwartnarueput said the bank promotes the use of four currencies under local currency settlements -- the Chinese yuan, the Japanese yen, the Malaysian ringgit and the Indonesian rupiah -- to drive trade, investment and tourism between Thailand and the nations.
On December 2011, the Bank of Thailand and the People's Bank of China (PBOC) signed the yuan-baht Bilateral Currency Swap Arrangement (BSA). The BSA aims to support trade and investment in local currencies, strengthen bilateral financial cooperation between the two countries, and bolster confidence among the private sector in using local currencies for cross-border operations.
The two banks renewed the BSA in 2020, allowing for the exchange of local currencies of up to 70 billion yuan or 370 billion baht for a period of five years, starting from December 2020.
In December 2016, Bank Negara Malaysia and the Bank of Thailand signed memorandums of understanding (MoUs) with Bank Indonesia on a framework of cooperation to promote the settlement of bilateral trade and direct investment in their local currencies.
The Bank of Thailand and the Bank of Japan renewed their Bilateral Local Currency Swap Arrangement, first signed in 2020, for a three-year period until March 30, 2026.
The arrangement is designed to enhance the financial stability of the two countries, allowing for the exchange of local currencies between the two central banks of up to 240 billion baht or ¥800 billion.
This agreement enables the central banks to provide baht or yen liquidity to eligible financial institutions in Thailand and Japan.
What is the likelihood of greater yuan-baht settlement?
The Thai central bank is talking with the PBOC on how to promote the use of the yuan, with the Bank of Thailand expected to relax rules on yuan usage for trade, investment and tourism activity this year to help reduce the impact of currency volatility, said central bank deputy governor for monetary stability Mathee Supapongse.
"Easing rules would encourage the private sector, both financial institutions and business operators, to use yuan-baht settlement and payment in the three core areas of trade, investment and tourism," he said.
Business exposure in these areas between China and Thailand has been increasing, said Mr Mathee.
However, yuan-baht settlement and payment are still low compared with financial transactions between yuan and other regional currencies, he said. This is partly attributed to Thailand having fewer financial facilities from China compared with other countries in the region, said Mr Mathee.
Despite encouraging local currency settlement for some time, the limited amount of yuan-baht transactions caused the Bank of Thailand to study barriers, including regulatory limitations, he said.
Why is it important to promote more transactions in yuan?
According to central bank data, trade linkages with China play a significant global role. The Chinese authority announced a policy to internationalise the yuan in 2009, promoting it as an international currency.
As part of this policy, China has allowed the use of onshore yuan for international trade settlement and appointed the first offshore yuan business in Hong Kong. This aligns with the Bank of Thailand's strategy to support the use of local currencies to help reduce foreign exchange risk.
As yuan trade settlement has lagged some regional currencies, central bank studies found this could be attributed to a lack of understanding about the rules and regulations.
To support yuan cross-border settlement, the central bank and three Thai commercial banks collaborated to provide a summary of the rules and regulations as well as other useful information, particularly yuan/baht counter rates quoted by commercial banks, on the Bank of Thailand website under "RMB Transaction".
Regarding the yuan liberalisation process, offshore yuan trade settlement has been increasing at a fast pace since the first quarter of 2010, according to the Bank of Thailand.
Amid the growing appetite for the Chinese currency, several commercial banks in Thailand have started to offer yuan-denominated financial products and services, such as yuan deposit accounts and letters of credit, to their clients in order to give companies more choices for trade payment.
However, those products and services are relatively limited and the volume of transactions denominated in yuan is still negligible, according to a Bank of Thailand research article.
In addition to a lack of understanding of the rules and practices, there is a higher bid-ask spread for yuan-baht compared with the US dollar. This is understandable as most international trade transactions are settled in US dollars, making that market more liquid, said the central bank.
The success of the yuan internationalisation process will depend on China's policies as well as the currency's credibility and the confidence of yuan holders in other countries, noted the article.
As the world shifts towards multiple international currencies, Thailand needs to develop and prepare its domestic financial market and offer Thai businesses a variety of currency settlement options, said the central bank.
Thai companies should have more alternatives to find a suitable approach to settle cross-border trade transactions, which will reduce overreliance on any single currency, noted the research article.
What is the level of Thai-Chinese business activities?
With the Thai economic recovery mainly supported by tourism, China looks to remain a solid contributor to that sector. Chinese tourists are expected to increase significantly in the second half of this year.
"The Chinese economy is rebounding from the pandemic and serves as a driving force for the regional and global economies," said central bank assistant governor Piti Disyatat during an interview with Xinhua, the state news agency of China.
"China's economy has progressed in terms of integration into the global economy and rapid growth. I'm optimistic about the prospect of economic and trade cooperation between Thailand and China as the two economies are closely integrated and there is already structural parallels."
Mr Piti is eager for new opportunities that are mutually beneficial in terms of cooperation on the Belt and Road Initiative and local currency settlement.
According to Kasikorn Research Center (K-Research), China is a major Thai trade partner and business activity has been rising for several years.
Last year China-Thailand trade value increased to $105 billion, representing 17.9% of Thailand's total trade value.
Yuan transactions remain low at 2.26% of total international trade transactions, lagging behind the US dollar, euro, pound and yen, respectively.
In 2022, Thai exporters used yuan for trade settlement totalling 0.5% of export value, rising from 0.1% in 2015, according to K-Research.
Thai importers used yuan for trade settlement valued at 1.9% of total import value last year, increasing from 0.4% in 2015.
This is in line with Thai exports to China totalling 12% of export value, while imports from China comprise 23% of the total value, according to the research house.
