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Border conflict? RBI nod India's 'brotherly' help to China internationalise its currency

By Bhabani Shankar Nayak*
In the middle of a global pandemic, China started an unprovoked border conflict with India. It unraveled trust deficit and ties between the two neighbours. As thousands of Chinese troops tried occupying Indian territory, the Narendra Modi-led BJP government directs the Reserve Bank of India (RBI) to allow the Bank of China to start regular banking services in India. The Bank of China will now operate in India like any other commercial banks.
This is going to put Indian banking industry in serious risk. The Bank of China has nothing new to offer to India banking sectors in terms of new technology and capital. It will only spread risks within Indian banking sector. It looks as if China started border conflict consciously to bargain its entry into Indian banking sector.
The post-2008 economic crisis followed by the 2015 stock market crash, debt crisis, capital flight and higher capital outflow, loss of foreign reserves, depreciation of Chinese Yuan against USD, fragile stock markets, high leverage, and soaring housing prices are some of the causes behind risks and instabilities within China’s financial system.
The dual track reform policies pursued by the Chinese government did not succeed. Before the outbreak of the coronavirus, the China Financial Stability Report (2019) was published on November 25, 2019 by the People’s Bank of China. It revealed serious banking crisis in China.
The report found that 586 banks and 13% of financial institutions were under high risk category and some of the banks were declared bankrupt. The report did not reveal the name of risky and bankrupt banks, which are operating under the Bank of China.
Many medium and large size Chinese banks have failed the capital reserve test and liquidity stress test conducted by the People's Bank of China (PBOC). It shows the level of risks and crisis within Chinese banking sector. The negative oil prices are exacerbating risks and crisis within the Chinese banking system.
Chinese banks are preparing for worst case scenarios after the outbreak of the coronavirus pandemic when their net profits are falling
The Chinese banks are preparing for worst case scenarios after the outbreak of the coronavirus pandemic. The net profit has fallen for the Industrial and Commercial Bank of China (the world’s largest commercial bank), Bank of China, Agricultural Bank of China, and  the China Construction Bank. These four are four biggest biggest Chinese banks contracting in their operations for profit.
The impact of the pandemic risks on Chinese banking system is going to be huge. It is argued that the rising bad loans as a result of loan defaults can rise five-fold within thirty largest Chinese banks. The China Banking and Insurance Regulatory Commission shows its helplessness under the current circumstances.
There is no option before the Chinese banks but to sit on the mountain risks and crisis. In this context, the Bank of China intends to use internationalisation as a strategy to spread its risks. So, the Chinese banks are going global; such a trend was never witnessed earlier by the global banking communities.
The internationalisation of Chinese banks is prelude to the internationalisation of its currency. The Bank of China will perform four functions in India that will help Chinese currency in the process of its internationalisation.
First of all, the Bank of China will facilitate widening of receipts and payment functions by its own currency during cross border trade. Secondly, it will help in investment and financing by expanding China’s interbank bond market. These two functions will enhance the circulation of Chinese capital and increase Chinese currency valuation in international markets.
Thirdly, it will serve to reduce Chinese debts and banking risks, as a result of which there will be financial stability within Chinese financial systems. And finally, as the central banks will have higher reserve of Chinese currency, China can use it as the modes of foreign exchange.
This way, the entry of the Bank of China into Indian banking sector is helpful to China by spreading risk and reducing its own banking crisis. It will leverage opportunities to expand its credit market within Indian banking sector. The Bank of China will not serve the interests of Indian people in anyway.
The Government of India is providing security to Chinese banks to pursue such an objective in India which is detrimental to the Indian banking sector. The banking sovereignty is paramount to the economic and political sovereignty of India.
---
*Coventry University, United Kingdom

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