Deni Ghifari, Jakarta – Indonesia and China are looking to become less reliant on the United States dollar by pushing ahead with the local currency transaction (LCT) scheme to conduct cross-border trade and investment using their own currencies.
Bank Indonesia (BI) Governor Perry Warjiyo said on Thursday that the LCT between the two countries reached a total value of US$13 billion in the first four months of this year, pointing to a significant speed-up from $18 billion recorded for all of last year.
"Settling trade and investment transactions directly in rupiah and renminbi further reduces the need for the dollar," Perry said in a press conference held after the monthly board of governors' meeting.
Perry had a meeting with his Chinese counterpart, People's Bank of China (PBOC) Governor Pan Gongsheng, in Shanghai on June 11, where the two explored the possibility of increasing a bilateral currency swap agreement (BCSA), according to a BI press statement released on the same day.
A BCSA is a contract between two central banks that allows them to exchange currencies up to a specified limit. It can serve various purposes, with one being to facilitate the implementation of an LTC scheme by ensuring both countries have access to each other's currency for trade settlements.
BI and the PBOC launched their BCSA in 2009. The contract lasts for five years and has been constantly renewed before the expiration.
The latest BCSA contract renewal between BI and the PBOC was signed on Jan. 31, 2025, for a duration of year years and with the limit set at 400 billion yuan ($59 billion).
Perry said the plan to increase the limit was in line with "China's policy in internationalizing renminbi".
BI signed a similar contract renewal with the Bank of Korea in February for 10.7 trillion in Korean won ($6.97 billion) alongside one with the Reserve Bank of Australia in March of last year at the value of A$10 billion ($6.95 billion).
Most of the transactions under the Indonesia-China LCT were for trade rather than investment, thereby reducing reliance on the US dollar in bilateral exports and imports.
By conducting bilateral trade in their respective currencies without using the dollar as a go-between, countries can eliminate exchange rate risks, cut transaction costs and reduce the need for dollar reserves.
They also mitigate geopolitical risks by insulating such transactions from a potential weaponization of the dollar for economic sanctions.
Perry said the LCT schemes BI is pursuing with partnering countries were "end-to-end", which in the case of China included the integration of Indonesia's state-owned Bank Mandiri into the PBOC-owned cross-border interbank payment system (CIPS).
CIPS facilitates international trade, investment and financial market operations, serving as an alternative to the traditional financial networks dominated by the Western countries.
BI is also implementing cross-border QR code payments with partnering countries to expand the LCT into the retail sector. This has already been achieved with Thailand, Malaysia, Singapore, Japan, South Korea and China.
The endeavor to become less dependent on the US dollar, also referred to as de-dollarization, is also on the agenda of the BRICS bloc, a forum Indonesia joined with full membership in January last year.
Indonesia has formally distanced itself from any frontal de-dollarization discussion at BRICS, but economists note that BI's policy of diversifying currency settlements is a de-dollarization effort in and of itself.
Permata Bank chief economist Josua Pardede told The Jakarta Post on Tuesday that the ultimate goal is to reduce dependence on the dollar, "not removing the dollar's role altogether".
He explained that de-dollarization could reinforce the archipelago's economic resilience, since it could ease the external pressure created whenever the dollar strengthens.
"However, the negative impact also warrants caution. First of all, reducing dependence on the dollar should not mean shifting to a new reliance on the renminbi or certain partnering [countries'] currencies," said Josua.
Syafruddin Karimi, an economics professor at Andalas University, told the Post on Tuesday that de-dollarization came with risks, given that the liquidity of local currencies was "not as deep as that of the dollar" and that businesses were accustomed to using the dollar because global networks for payments, contracts and financing were built on the dollar.
"Indonesia has to conduct de-dollarization in stages, pragmatically and based on the needs of real transactions. A healthy de-dollarization is not ideological in nature. It should reinforce efficiency, rupiah stability and financial system resilience," said Syafruddin.
Source: https://asianews.network/indonesia-china-ramp-up-de-dollarisation-effort