Can India-China Work a Yuan-Rupee Payment Plan To Boost Trade?

Can India and China work out a Yuan-Rupee payment system for better trade prospects? India-China trade, at present, stands at approximately USD 84 Billion and experts suggest that the Yuan-Rupee payment plan has the potential to boost the trade further due to easier payment options.

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China, for now, has declined India’s proposal to trade in rupee-yuan terms, a plan that was considered in an inter-ministerial meeting in October. An unidentified official noted that China didn’t accept the proposal, without elaborating on the reason for the denial.

New Delhi is being encouraged to promote exports in its domestic currency to narrow deficits with its trading partners such as China, the media report said. Bilateral trade between China and India was about $84.4 billion in 2017, with imports from India reaching about $16 billion and exports from China worth around $68 billion, according to figures released by the General Administration of Customs in January.

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The Indian rupee recorded its worst performance against the US dollar following the country’s currency reform at the beginning of 2018, and this was a major reason why China might have rejected India’s proposal for a yuan-rupee payment system in bilateral trade, Tian Guangqiang, assistant research fellow with the National Institute of International Strategy at the Chinese Academy of Social Sciences, told the Global Times on Monday.

“Also, the rupee is not an international reserve currency. If this payment system goes ahead, China will hold a large amount of Indian rupees, which couldn’t be widely used in other international transactions except in South Asia,” he said. While the proposal did not sound attractive to Chinese experts, some Indian and Chinese traders said it might facilitate trade between two major economies in Asia.

The Indian rupee depreciated 13 percent against the US dollar since the beginning of 2018, media reported in September.  China and India have been strengthening trade ties, especially as they both face rising protectionism and want to protect free trade, Qian Feng, a research fellow at Tsinghua University’s National Strategy Institute stated.

In recent years, BRICS countries – Brazil, Russia, India, China and South Africa – have been working on local currency settlements and currency swaps, which would ease their dependence on US dollar-denominated transactions, Chinese official news website reported in August 2017.

China and India should enhance domestic currency settlements to reduce foreign exchange risks and minimize the impact of US dollar fluctuations, according to the report. “India should also work to expand value-added exports to China such as software and healthcare products to narrow its trade deficits with China, instead of mainly focusing on currency tools,” Tian added.

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