Southeast Asian countries increasingly prefer to use the yuan for settlement

Southeast Asian countries are showing growing interest in the yuan settlement channel, while China is trying to promote the yuan as the main cross-border payment currency in the region, increasing China's economic and political influence in the region.

China's central bank is stepping up efforts to expand cross-border renminbi financial transactions in Southeast Asia, offering Southeast Asian companies an alternative to the US dollar.

If local companies in Southeast Asia widely use the yuan for transactions, it will increase the region's dependence on China's financial system and expand China's influence in the region.

The extent to which intra-Asian trade payments and financial transactions are conducted in yuan, especially those without the involvement of Chinese companies, will be important. If the yuan and China's financial market infrastructure take a significant share of intra-regional payments, it will essentially increase China's regional economic influence.

Chinese officials have been promoting the use and financial integration of the renminbi in Southeast Asia. In June, the People's Bank of China announced its participation in a renminbi liquidity facility sponsored by the Bank for International Settlements, which will allow participating central banks to seek renminbi funding support in times of financial market volatility. Three of the five participating central banks are from Singapore, Malaysia and Indonesia.

Southeast Asian countries have an incentive to reduce their use of the dollar, in part because many officials are concerned about the potential economic impact of the Federal Reserve's recent interest rate hikes and other monetary tightening on the region.

Chinese banks have set up branches across Southeast Asia to provide foreign exchange services and yuan accounts to local businesses, and they have also encouraged Chinese companies to issue more yuan trade invoices in an effort to develop the yuan's foreign exchange market with Southeast Asia and support the use of the yuan by Southeast Asian economies.

Bankers in Southeast Asia are unhappy with the inefficiency of existing dollar payment procedures and processes.

Myanmar's military government is actively exploring ways to circumvent EU and US sanctions by making deals with Russia. Given Vietnam's relatively close commercial and security ties with Russia, the Vietnamese government is likely to increasingly explore payment channels in yuan.

Indonesia and China, its largest trading partner, reached a local currency settlement agreement in 2021, leading to a regional interbank market for trading the rupiah and yuan. Indonesia's central bank aims to increase trade and investment settled in local currencies by 10 per cent this year.

The regional trade Agreement RCEP, initiated by the ten ASEAN countries and officially launched this year, has created conditions for enhancing the regional status of the RMB. The RCEP is the world's largest free trade area, accounting for about 30% of the world's population, trade volume and GDP, and as the volume of trade between China and the contracting parties grows, so does the opportunity for the RMB to serve as a pricing and settlement currency.

Asean's dependence on China's economy is the foundation of the relationship and a major breakthrough for China to expand its influence in the region. Trade between China and ASEAN stood at $544.88 billion in the first seven months of this year, up 13.1 percent year on year, according to Chinese official data. China has been ASEAN's largest trading partner for 13 consecutive years.