Jakarta. The framework of the local currency settlement, or LCS, between Indonesia and China officially came into effect, thus increasing the use of rupiah or yuan in their bilateral transactions while lessening both nations' dependence on the dollar.
Bank Indonesia and its Chinese counterpart People’s Bank of China inked the memorandum of understanding on the LCS framework last September.
The framework encompasses the use of direct exchange rate quotation, as well as relaxation of certain regulations in the foreign exchange transactions between rupiah and yuan.
“This partnership is part of Bank Indonesia’s continuous efforts to promote a wider use of local currencies in the settlement of trade transactions and direct investments with various partner countries,” the Indonesian central bank wrote in their official statement on Monday.
According to BI, the LCS expansion will support rupiah's stability by lowering reliance on certain currencies in the domestic foreign exchange market.
Thanks to the LCS, businesses can enjoy lower conversion costs, and now have an option for trade financing and direct investment in local currencies. The LCS offers alternative hedging instruments in local currencies. It also diversifies currency exposure in cross-border transaction settlements.
China is one of Indonesia's biggest trading partners, with bilateral trade expected to reach $79 billion this year. In the first quarter alone, the bilateral trade was valued at $25 billion.
BI and PBC have selected qualified banks in their respective countries as the appointed cross-currency dealers (ACCD).
The appointed banks are deemed to have the ability to facilitate rupiah and yuan transactions in accordance with the agreed LCS framework, according to BI.
Criteria for the ACCDs include sufficient level of resilience and soundness and good relations with the banks in the partner country, among others.
Among the chosen ACCDs in Indonesia are Bank Central Asia, Bank of China (Hongkong), Bank China Construction Bank Indonesia, Bank Danamon Indonesia, Bank ICBC Indonesia.
Also on the list are Bank Mandiri, Bank Maybank Indonesia, Bank Negara Indonesia, Bank OCBC NISP, Bank Permata, Bank Rakyat Indonesia, and Bank UOB Indonesia.
The appointed banks in China include Agriculture Bank of China, Bank of China, Bank of Ningbo, Bank Mandiri Shanghai Branch, China Construction Bank, Industrial and Commercial Bank of China, Maybank Shanghai Branch.
And last but not least is the United Overseas Bank (China) Limited.
Prior to China, Indonesia has already established LCS frameworks with Japan, Malaysia, Thailand.