(Yicai) May 27 -- The central banks of China and Indonesia are expanding their cooperation on local currency settlement to include portfolio investments, further promoting the use of the yuan and rupiah in trade and investment.

The People's Bank of China and Bank Indonesia signed a memorandum of understanding to widen the scope of cooperation from current account and direct investment transactions to cover all transfers related to capital and financial accounts, the PBOC announced recently. The previous agreement was signed in September 2020.

The local currency settlement framework was initiated by several central banks in the Association of Southeast Asian Nations to reduce exchange rate risks and currency conversion costs for businesses, by increasing the use of local currencies within the region. Indonesia has already established similar agreements with Malaysia, Thailand, Japan, and South Korea.

China and Indonesia began collaborating on local currency settlement in September 2021. Since then, the central banks of both countries have designated several commercial banks as appointed cross-currency dealers. These banks can open accounts in each other’s currencies to support cross-border payment settlements for enterprises.

In addition, the PBOC’s foreign exchange trading platform launched a direct trading mechanism for the Chinese yuan and Indonesian rupiah in 2021. This allows ACCD-designated banks in both countries to provide market-making quotes, enhancing liquidity in bilateral currency exchange.

Since the cooperation began, transaction volumes have surged. Last year, the total cross-border yuan settlement under the LCS framework reached CNY16.2 billion (USD2.3 billion), up 24 percent year-on-year. Yuan/rupiah transactions grew by 51 percent to CNY4.5 billion (USD625.7 million), Yicai learned from the PBOC.

Editors: Dou Shicong, Emmi Laine