Published June 15, 2009

China, M'sia currency swap to take place in near term

Move will give more flexibility to exporters

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(BEIJING) China and Malaysia are planning to allow exporters to settle some of their trade in the two nations' currencies after the countries agreed to a currency swap arrangement in February, Malaysia's central bank said last week.

The move would give exporters more flexibility and would not replace the US dollar as a trading currency, Bank Negara Malaysia governor Zeti Akhtar Aziz told reporters at a conference here last Friday.

She did not provide a timeframe on when the plan may be implemented, saying that it will be in the 'near term.'

The swap arrangement 'is to facilitate trade and investment between the two countries rather than a liquidity requirement because we have ample liquidity', Ms Zeti said. 'Now, we're working on operationalising this arrangement; and essentially, it's to give the option to exporters and importers to settle in the local currency.'

Chinese and Malaysian central banks agreed on an 80 billion yuan (S$17 billion), three-year currency swap in February.

The US dollar's status as the world economy's sole reserve currency has come into question as leaders of Brazil, Russia, India and China discuss substituting other assets for their US dollar holdings amid a ballooning US budget deficit.

'There is now increased currency volatility happening partly because of the global financial crisis that's happening, so there may be a greater motivation' for such currency arrangements, Ms Zeti said. 'But it is to give that flexibility, and it's not intended to replace' any currency, she said.

Russian President Dmitry Medvedev this month proposed that nations use a mix of regional reserve currencies to reduce reliance on the US dollar.

While the world should discuss ideas to reform the global monetary system, any talk of dumping the US dollar is 'unrealistic', China's Vice-Foreign Minister He Yafei said on June 9.

Exporters and importers would benefit from 'lower transaction costs and less exposure to currency fluctuations', Ms Zeti said. 'Now, there are pressures on margins, so any cost-saving will be of value.'

The Chinese yuan and the Malaysian ringgit are managed against a basket of currencies. The two countries removed their respective pegs against the US dollar in July 2005.

Malaysia's central bank has kept its key interest rate unchanged at 2 per cent for the last two meetings, saying that previous cuts and government stimulus measures will contribute to a recovery later this year.

'Right now, we've said our focus is ensuring access to financing, and this is happening through many, many measures,' Ms Zeti said.

'All these are more important than the cost' of financing.

The impact of the Malaysia's fiscal stimulus plans on the economy will be seen in the second half, she reiterated last Friday.

Malaysia's economy contracted for the first time since 2001 last quarter as exports slumped, pushing the nation towards its first recession in a decade. -- Bloomberg