Yuan set to end US dollar dominance in Cambodia

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The National Bank of Cambodia and the People’s Bank of China announced that they – for the first time – have introduced an official yuan-riel exchange rate regime that allows businesses and individuals to conduct trade settlement activities without using the US dollar as an intermediary currency.

The announcement, made by a Cambodian central bank spokesman, confirms a report by Khmer Times published earlier this month.

Sum Saniseth, vice governor of Cambodia’s central bank, said the exchange rate would not only make it easier to conduct cross-border business with China, but it was also useful for Cambodia because China is the country’s most important source of foreign investment and its nationals make the highest share of tourists visiting the country.

While the yuan could be exchanged in Cambodia by Chinese visitors into riel at market rates benchmarked to the US dollar before, it can now be done in China too. Currently, the rate is about 610 riel to 1 yuan and will be adapted in accordance to currency market fluctuations.

As far as trade settlements are concerned, trade partners from both countries are now able to determine a direct quotation without going through the US dollar, reducing currency risk and encouraging the use of the riel for large business transactions.

Analysts see the move as part of China’s effort to internationalise the yuan and reduce the dominance of the US dollar in regional trade in Southeast Asia. In turn, it is also an effort of the Cambodian government to “de-dollarise” its economy and promote its very own currency to be circulated at the international level.

Cambodia is among the highest dollarised countries in Asia, with more than 80 per cent of business transactions done in US dollar. The greenback flooded into the country’s economy through the intervention of the United Nations Transitional Authority in Cambodia in their peace operations in 1993 when Cambodia prepared to become an independent country again.

While the US dollar-based economy has attracted foreign investors in the past, enhanced Cambodia’s global economic integration and protected it from the Asian financial crisis in 1997, there have also been negative effects, namely the exposure to the monetary policy of the United States.

When the value of the US dollar rises, the economy in Cambodia, particularly exports and tourism, is affected, without leaving the country’s central bank with tools to intervene. The use of US dollars makes transacting in the local currency also more expensive because merchants are forced to maintain two accounting sets, effectively penalising those who use riel. The central bank is also to a large extent deprived of the power to provide and control liquidity in domestic currency to commercial banks and thus stimulate the economy through interest rate intervention.

However, observers have warned that a rapid de-dollarisation without vigorous administrative measures – such as a peg to another important global trade currency – would cause large capital outflow and the formation of a black currency market, leading to imbalances of macroeconomic growth. Tying up with the yuan seems to be a feasible solution for the problem.

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The National Bank of Cambodia and the People’s Bank of China announced that they – for the first time – have introduced an official yuan-riel exchange rate regime that allows businesses and individuals to conduct trade settlement activities without using the US dollar as an intermediary currency. The announcement, made by a Cambodian central bank spokesman, confirms a report by Khmer Times published earlier this month. Sum Saniseth, vice governor of Cambodia’s central bank, said the exchange rate would not only make it easier to conduct cross-border business with China, but it was also useful for Cambodia because China is...

Reading Time: 2 minutes

The National Bank of Cambodia and the People’s Bank of China announced that they – for the first time – have introduced an official yuan-riel exchange rate regime that allows businesses and individuals to conduct trade settlement activities without using the US dollar as an intermediary currency.

The announcement, made by a Cambodian central bank spokesman, confirms a report by Khmer Times published earlier this month.

Sum Saniseth, vice governor of Cambodia’s central bank, said the exchange rate would not only make it easier to conduct cross-border business with China, but it was also useful for Cambodia because China is the country’s most important source of foreign investment and its nationals make the highest share of tourists visiting the country.

While the yuan could be exchanged in Cambodia by Chinese visitors into riel at market rates benchmarked to the US dollar before, it can now be done in China too. Currently, the rate is about 610 riel to 1 yuan and will be adapted in accordance to currency market fluctuations.

As far as trade settlements are concerned, trade partners from both countries are now able to determine a direct quotation without going through the US dollar, reducing currency risk and encouraging the use of the riel for large business transactions.

Analysts see the move as part of China’s effort to internationalise the yuan and reduce the dominance of the US dollar in regional trade in Southeast Asia. In turn, it is also an effort of the Cambodian government to “de-dollarise” its economy and promote its very own currency to be circulated at the international level.

Cambodia is among the highest dollarised countries in Asia, with more than 80 per cent of business transactions done in US dollar. The greenback flooded into the country’s economy through the intervention of the United Nations Transitional Authority in Cambodia in their peace operations in 1993 when Cambodia prepared to become an independent country again.

While the US dollar-based economy has attracted foreign investors in the past, enhanced Cambodia’s global economic integration and protected it from the Asian financial crisis in 1997, there have also been negative effects, namely the exposure to the monetary policy of the United States.

When the value of the US dollar rises, the economy in Cambodia, particularly exports and tourism, is affected, without leaving the country’s central bank with tools to intervene. The use of US dollars makes transacting in the local currency also more expensive because merchants are forced to maintain two accounting sets, effectively penalising those who use riel. The central bank is also to a large extent deprived of the power to provide and control liquidity in domestic currency to commercial banks and thus stimulate the economy through interest rate intervention.

However, observers have warned that a rapid de-dollarisation without vigorous administrative measures – such as a peg to another important global trade currency – would cause large capital outflow and the formation of a black currency market, leading to imbalances of macroeconomic growth. Tying up with the yuan seems to be a feasible solution for the problem.

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