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The peso-renminbi exchange system.

The Bangko Sentral ng Pilipinas and the Bank of China are set to formally ratify the establishment of a system that will allow local banks to directly exchange renminbi (RMB) to peso and vice versa. One rational for this agreement is

that this will allow for a 'better' exchange rate of

the two currencies. As such, it will make transacting business between the two economies easier and less complicated. This is a positive.

Unfortunately, there is much misinformation and ignorance about this move because people do not understand how currencies and currency exchange rates function.

No, this does not mean that the Chinese are going to more easily take over the Philippine economy, contrary to what those with Sino-phobia would like you to believe. For those that have 'American-phobia,' this is not another nail in the coffin of the US dollar.

In order to buy your fix of Chicken Joy in Houston, Texas, you must first 'buy' US dollars with your Philippine pesos because in the US, the peso is not a medium of exchange. Likewise, an American tourist experiencing withdrawal symptoms from not having a Big Mac for several days must 'buy' Philippine peso as the US dollar is not a medium of exchange in the Philippines. That is simple enough.

The US dollar-since 1971-is the world's 'reserve currency,' meaning that all currencies are ultimately valued by its exchange rate to the dollar and not gold as before. Almost all currencies are 'fully convertible,' meaning that you can exchange Philippine peso for the local currency. However, at the moneychanger in the Murtala Muhammed International Airport in Lagos, Nigeria, the dollar exchange rate of the Nigerian naira and the peso-dollar rate will determine the naira-peso rate. The US dollar ultimately determines the 'value' of all currencies.

You can run from the US dollar but you cannot hide.

To make exchange rates less complicated, countries are making bilateral agreements to settle trade in local currencies rather than first pass through the dollar. Trade contracts can be written in local currencies rather than in US dollars, and that makes sense. For example, China buys soybeans from Brazil at a price in either RMB or Brazilian reals. Brazil buys cell phones from China and pays either in RMB or reals. There may be enough trade to provide both countries with enough currency from the other to eliminate using the dollar at all.

For the first six months of 2018, the Philippines sold $4.09 billion worth of goods to China and bought $9.99 billion, resulting to a $5.90-billion trade deficit. Under the new system of settling this bilateral trade in local currency, the Philippines could buy its goods using pesos and China could buy Philippine goods also using pesos. At the end of the year-using 2018 as the example, China would be holding $5.90 billion worth of pesos, which they could use to buy Philippine goods.

Initially, the RMB-peso will still be pegged to each currency's exchange rate to the dollar. But in the long term, with a huge increase in trade, investment and tourism receipts between the two countries-theoretically-a RMB-peso exchange rate could be completely independent of the US dollar rates. This is what is beginning to happen between China and Russia, and it is beneficial to both economies.

Nonetheless, the current amount of bilateral trade settled in local currencies is a drop in the ocean. The US dollar dominates as the payment currency for global trade with an 80-percent share of inter-regional currency usage.
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Publication:Business Mirror (Makati City, Philippines)
Geographic Code:9CHIN
Date:Nov 2, 2018
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