Sino-Russian trade set to soar with PVP
Recent launch of yuan-rouble payment versus payment mechanism has wide implications for world economy
Further tangible initiatives highlighting the continued internationalization of the Chinese economy abound, but perhaps one of the most significant was launched only a few weeks ago: the establishment of a payment-versus-payment, or PVP, system for Chinese yuan and Russian rouble trade transactions.
Such a system will immediately improve efficiency and reduce risk for all business transactions between the two economic giants. No longer will there be a need for a “safe and secure” third currency, more often than not the US dollar, and the time and potential cost that could result.
European business and European governments should monitor very closely the impact this Sino-Russian PVP system has on the level of trade and investment.
It is also the intention of the Chinese government to roll out a series of similar PVP systems with other currencies, particularly those where trading opportunities are most attractive. While the Belt and Road Initiative is often cited as a major focus for the further internationalisation of Chinese industry and the Chinese currency, European businesses should note that this initiative is mainly about opening up trading routes with Europe, and Eastern Europe in particular.
For now, Russia presents the obvious first step in any PVP system rollout. China relies heavily on Russia for both oil and gas, for example. Russia also presents an opportunity for a mutually beneficial trading partnership across Asia as well as an important steppingstone into Europe for Chinese companies.
It is, therefore, highly likely that imminent PVP systems could be established between the Chinese yuan and one or more of the currencies of Central and Eastern Europe. China has for quite some time made it clear that trade and cooperation with CEE’s 16 countries (the 16-plus-1 group) is pivotal to the success of Belt and Road and the continued internationalization of both the Chinese currency and the economy.
Specifically targeting 16 CEE countries and even labeling this focus as “16-plus-1” provides an unequivocal opportunity for close trade and cooperation. While such innovative PVP systems that settle trade transactions simultaneously in two currencies will benefit companies of all sizes, it is particularly the small and medium-sized enterprise sector that stands to gain the most.
A typical SME’s day-to-day challenges come no greater than liquidity management. “Cash flow kills” remains one of the most common reasons behind SME bankruptcy but use of a PVP system to settle business with a cross-border trading partner helps to optimize liquidity and provides a much faster financial conclusion to any deal done.
Of course, the European single currency, the euro, represents an extremely attractive opportunity as part of any yuan-led PVP expansion strategy. Many of the now-19 member countries that have adopted the euro as their only currency can be located in or near Eastern Europe, for example Slovakia, Lithuania, Latvia and Estonia.
Trading deals and all kinds of corporate links between Chinese and Eastern European companies could be stimulated significantly by the prospect of additional PVP systems, given the economic compatibility between China and the Eastern European region. Both are developing and learning fast and both of the Chinese currency, which will also enhance the overall trading environment and atmosphere between China and Europe, China’s largest export market. The US government and US companies should hold no fear here. While US dollar hegemony will decline, the US currency and economy each will remain one of the most powerful and important and should benefit as well from the increasingly attractive Sino-European business environment.
The rollout of any China-led PVP system is now the issue, and European companies need to be prepared for the launch of a system between their home country base and China very soon, but the speed with which any rollout takes place depends also on the level of proactive partnership posturing between European governments and China. This almost certainly requires European governments to take a closer look at the Belt and Road Initiative and the huge economic game changer that this represents. It was, therefore, rather disappointing to witness a poor participation level by European countries at the Belt and Road forum held earlier this year in Beijing. Heads of some European nations were in attendance, such as Poland, Hungary and Switzerland, but far too many were very conspicuous by their absence.
Sino-European trade generally needs strong leadership at both government and corporate level. It therefore behooves European political leaders to pay more attention to China’s Belt and Road Initiative and related developments, such as the recent launch of the PVP system between the yuan and the rouble.
Expect many more related developments between China and central Asian and European nations, such as PVP systems and other projects that increasingly integrate cross-border trade. European nations and their companies could benefit most with slightly more political will. TheauthorisavisitingprofessorattheUniversity inBeijingandaseniorlectureratSouthampton reflectthoseofChinaDaily.