China and Indonesia officially launch RMB settlement mechanism, trade prospects look promising

China will officially use the yuan in trade transactions with Indonesia, meaning the two countries will no longer use the U.S. dollar as an international currency when conducting transactions between countries, according to Chinanews.com.cn.

In 2020, the trade volume between China and Indonesia reached US$78.37 billion, down 1.7% year-on-year. Among them, China exported US$41 billion to Indonesia and imported US$37.37 billion from Indonesia, down 10.2% and up 9.5% year-on-year respectively.

It is reported that the cooperation framework was formulated based on the memorandum of understanding agreed and signed by Perry Warjiyo, Governor of Bank Indonesia, and Yi Gang, Governor of the People's Bank of China, on September 30, 2020. The two sides officially launched the Indonesia-China local currency settlement mechanism, namely LCS, from September 6, 2021.

Bank of China (Hong Kong) Jakarta Branch and Bank of China have been selected as chartered cross-currency banks , which can carry out RMB - IDR settlement for current account and cross-border investment , and conduct direct quotation transactions between RMB and IDR.

On the same day, Bank of China (Hong Kong) Jakarta Branch completed the first direct quotation transaction of RMB and Indonesian rupiah under LCS, converting a sum of Indonesian rupiah into RMB at a direct quotation for Tsingshan Stainless Steel Co., Ltd. in Indonesia and remitting it to the RMB account of a service provider in Zhejiang Province. At the same time, it also completed a forward RMB purchase of foreign exchange for Sany Heavy Industry Indonesia. In addition, the branch also cooperated with the Bank of China Head Office and Zhejiang Branch to provide RMB and Indonesian rupiah quotations for customers in China, and successfully received the first Indonesian rupiah remittance under LCS from China.

China and India have officially adopted the RMB, which is undoubtedly good news for sellers. After skipping the US dollar payment link, sellers not only reduce the workload of exchange rate calculation, but also reduce the trade income affected by the fluctuation of the US dollar. In addition, the official launch of LCS indicates that China and Indonesia will develop a more friendly and free bilateral trade relationship. It is believed that there will be certain subsidy policies on tariffs and freight in the future, which can greatly reduce the burden on sellers.

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