Sino-Rus­sian trade set to soar with PVP

China Daily European Weekly - - Comment - Mike Bastin

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.


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