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Thailand and China are solidifying bilateral relationships by signing a local currency agreement to improve cross-border trade between the two nations.
The central banks of both countries inked a memorandum of understanding (MoU) to set up the “Cooperation Framework for Bilateral Local Currency Transactions.” The framework is expected to allow both countries to carry out international trade in the Chinese yuan or the Thai baht rather than the U.S. dollar.
People’s Bank of China (PBoC) Governor Pan Gongsheng signed the MoU with Governor Shethabu Suthiwanalyubu of the Bank of Thailand with the finer details of the document pledging greater financial cooperation between the countries.
The framework has several standout benefits for parties, including the shift from a dependency on the greenback to strengthening regional cooperation. Per the framework, businesses will have access to local currency financing, allowing access to loans in their own currency, which reduces exposure to foreign exchange risks.
The arrangement could rely on central bank digital currencies (CBDC) for settlements, given its sprawling use cases in cross-border trade. Both nations have previously teamed up to set up a joint CBDC project dubbed mCDBC, drawing participants from Hong Kong and the United Arab Emirates (UAE).
Following the framework’s provisions, mBridge will play a central role in the local currency agreement, but issues over a commercial rollout continue to trail the project. In late 2023, participants set their eyes on the launch of a minimum viable product (MVP) for the second quarter of 2024 while opening the doors for more central banks.
“We are expecting to welcome more fellow central banks to join this open platform,” said Hong Kong Monetary Authority (HKMA) Chair Eddie Yue. “And very soon we will launch what we call a minimum viable product, with the aim of paving the way for the gradual commercialisation of mBridge.”
Currently, over 15 central banks have joined the fray as observers, with the International Monetary Fund (IMF) and the World Bank watching keenly from the sidelines. Despite the technical innovation, The Bank for International Settlements (BIS) cites geopolitical issues as a potential stumbling block against an early rollout.
CBDCs or nothing
China has been moving toward CBDCs with its digital yuan reaching an advanced stage of pilots, racking multiple use cases in finance, transport, and securities.
On the other hand, Thailand has shown little enthusiasm in proceeding with a commercial rollout after completing its string of pilots.
The central bank says it will proceed with a cautious approach to avoid upsetting the delicate balance of the financial ecosystem but regional developments could force its hand.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: The state of play and what’s to come with CBDCs
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