Forex News

No Transaction Fee Waiver for US Dollar in China FX Market

The State Administration of Foreign Exchange (SAFE), China’s exchange regulator has in a communiqué said that effective August 1, it was excluding transaction fees between the Yuan and 12 other currencies that do not include the US dollar. These fees are a component of asking prices and bidding during the interbank trading of the Yuan.

The move is seen as an effort to strengthen the Yuan and skirt the US dollar. Other major currencies excluded are the Euro, British pound, Australian dollar, Hong Kong dollar, and the Japanese yen.

In a statement explaining the move, SAFE said that it is to “actively cooperate with the national belt and road development strategy, implement financial support for the development of the real economy, reduce corporate exchange costs, and promote the development of the direct exchange market for Yuan and foreign exchange between banks.”

The national belt and road development strategy is an ambitious infrastructure project by China and the brainchild of Chinese Communist Party general secretary Xi Jinping that was adopted in 2013. Known as the Belt and Road Initiative (BRI), it seeks to connect Asia, Africa, and Europe through road and maritime networks. From its initial humble beginnings, the project has now expanded to cover over 70 countries and 65 percent of the world’s population.

China feels that by not waiving transaction fees, the Yuan would get a boost, especially in the foreign exchange scenario between banks. A stronger Yuan in the foreign exchange market would help the BRI initiative that goes beyond boundaries as the US dollar is mainly used for cross-border deals.

Even though there is direct trade service between the Yuan and 20 other currencies, it is the US dollar that dominates the market. In the first quarter of 2020 alone, trade volume with China amounted to almost 11.2 trillion Yuan. This was almost 30 times the second-highest volume of the Euro.

However, the transaction fees for 12 currencies have been waived by China for three years. These are the Singapore dollar, Russia rouble, Korean won, Malaysian ringgit, New Zealand dollar, South African rand, Saudi riyal, United Arab Emirates dirham, Polish zloty, Hungarian forint, Turkish lira, and the Thai baht.

Experts feel that the initiative to boost these 12 non-US dollar currencies is a spillover of the strained relations between China and the USA, primarily related to the new security law in Hong Kong, China’s handling of the Covid-19 pandemic, and human rights violations on the Uygurs in Xinjiang.  

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Catherine Johnson

About author
Catherine Johnson is a Financial Education Instructor and a finance writer. She writes finance blogs and guides women to be financially independent. She also worked as a freelance finance writer.
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