Relations between China and Bangladesh have undergone a speedy transformation in the past few decades. The former is the latter's largest trading partner with the two-way trade exceeding USD 15 billion in 2016. There is a growing involvement of Chinese companies in Bangladesh's infrastructure and other development projects. Beijing is also the largest supplier of military hardware to Dhaka. Cultural and academic interactions between the two nations are on the rise. Moreover, Dhaka backs Beijing-led Belt and Road and other regional initiatives.

While China is financing some projects in Bangladesh and has pledged billions to develop the latter's infrastructure and other projects, there is a wide scope for financial cooperation between the two countries. There are several imperatives to increase financial cooperation. Both China and Bangladesh are late in reforming their services sector, including financial services. China, in particular, is opening up its services sector and all eyes are on the country's financial sector reforms. The United States and other developed nations which have a strong service economy have long urged Beijing to open up financial and other services.

The services sector is playing an increasingly important role both in China and Bangladesh, contributing over half of GDP. Services, including financial, are becoming more and more tradable. While there exist some mechanisms of financial cooperation in Southeast and East Asia, such institutional paths are largely absent in South Asia. The Belt and Road Initiative (BRI) stresses upon deep financial cooperation building a currency stability system, investment and financing system and credit information system in Asia.

That said, there have been some developments in China in terms of finance. The rise of China's currency, officially called the renminbi (RMB) and the yuan (the unit of account), is widely considered as the single most important phenomenon in global finance in this decade. The RMB, also known as "redback", is now the third most powerful currency after the US dollar and euro in IMF's Special Drawing Rights (SDR) basket. Following the inclusion in SDR in September 2016, RMB is likely to have an increased role in non-Chinese central bank foreign reserve management.

RMB's share of foreign assets, international debt securities issuance, cross-border payment and foreign exchange turnover are on the rise. The usage of RMB is projected to grow in line with the Middle Kingdom's trade, finance and other economic expansion. BRI, Silk Road Fund, outward FDI and other bilateral and multilateral financing by Export-Import Bank of China, and Asian Infrastructure Investment Bank, among others, could further increase the usage of RMB. While the size of China's GDP (USD 12 trillion), trade (USD 3.6 trillion) and foreign exchange reserve (USD 3 trillion) speaks volume, the RMB internationalisation largely depends on the degree of the currency's convertibility (which, as of now, is not fully convertible).

There have been attempts to internationalise RMB through several mechanisms: price and international trade settlement, as an investment vehicle and as an international reserve. Steps have been taken to materialise the plan which includes settlement of trade through RMB, development of offshore RMB bond markets and currency swap agreements.

The redback is the top currency with respect to currency pairs not settled in CLS, a specialist US financial institution that provides settlement services to its members in the foreign exchange market. Except the United States, the top trading partners of China are using RMB significantly (more than 15 percent) for payments to China and Hong Kong. London is the top RMB FX trading centre globally followed by Hong Kong, US, France and Singapore. To create RMB liquidity, the People's Bank of China has signed numerous currency swap agreements with a number of central banks including European Central Bank.

The race for Asia's top financial centres is decisively shifting towards greater China. Hong Kong, which ranks as the top financial centre in Asia and is the third most powerful globally after London and New York, faces increasing competition from mainland cities. With Shanghai and Shenzhen adopting speedier listing processes and strong demand from investors, these two bourses ranked first and second—having pushed Hong Kong to the third place in IPO (initial public offering) market. To enhance financial cooperation among regional countries there is an initiative under the aegis of Pan Asia Stock Exchange, headquartered in Kunming. A bond market called Bond Connect was launched in July 2017 to offer China Interbank Bond Market access to a broader group of international investors.

Many Chinese companies with their deep-pockets are going global—backing tech start-ups. Alibaba, China's technology conglomerate, and affiliate Ant Financial, parent company to digital payment service Alipay, have injected USD 680 million into Paytm, India's largest e-payments and e-commerce entity. China is now the second largest source of outward foreign direct investment in the world.

There is an immense scope for Bangladesh to strengthen financial cooperation by way of taking advantage of the rise of China's financial sector. The two-way trade between the countries could exceed USD 20 billion before 2020 and reach as high as USD 30 billion by the beginning of the next decade. Currently, all trade between China and Bangladesh is conducted in US dollar. A significant portion of their trade can be settled in RMB reducing trade cost and diversifying currency risk. To facilitate trade in RMB there should be cooperation, including currency swap agreements between the two countries' central banks.

Given the prospects of Bangladesh's equity markets, Chinese stock exchanges are showing greater interest to get involved with the former's bourses. Similar reciprocity is also visible among equity investors and market makers in Dhaka. In addition, Dhaka Stock Exchange and Chittagong Stock Exchange which are members of Pan Asia Stock Exchange can work closely with Chinese and other regional bourses. This could help raise funds to finance many cross-border mega infrastructure projects facilitating trade and connectivity in the region.

China is developing financial sector banking on modern technology, including application of artificial intelligence. The country's e-commerce and e-payments system is being revolutionised as cash is increasingly becoming obsolete. Greater cooperation between Chinese and Bangladeshi technology entities, notably the private sector, could help increase penetration of technology in e-commerce and e-payments. As financial services are becoming increasingly tradable, more and more complementarities between China and Bangladesh are likely. This could also open new horizons for Bangladesh's ICT and financial services exports.

Given the lack of effective leadership and initiatives, there is no clear roadmap of financial integration in South Asia. As the Asian financial architecture is still evolving, it is widely believed that it would be developed centring Asean and East Asian countries, notably China. The launch of BRI could expedite the process. Thus, Bangladesh should explore the opportunities that arise in China and other countries in the region. 

Finally, all these opportunities can be availed if Dhaka expedites financial reforms. Institutions that manage finance such as Bangladesh Bank and stock exchanges, inter alia, should be given more autonomy. The role of the private sector is equally important if Bangladesh is to take advantage of services-led growth.  

M Shahidul Islam is a doctoral candidate at the School of Economics, Huazhong University of Science and Technology, China.

Email: shahid.imon@live.com