By Mary Watkins in Mumbai
Sri Lanka?s central bank has given approval for the renminbi to be used in cross-border banking transactions, in a move that underscores the growing internationalisation of the Chinese currency as well as the close ties between the two countries.
The central bank said its monetary board had agreed to allow the use of the renminbi in international banking deals because it would ?significantly facilitate? the growing volume of trade and investments between Sri Lanka and China.
?China is recognised today as the world?s second-largest economy, while also being a leading player in international trade, investments and foreign reserves. It also enjoys extensive economic connections with many countries; as a result the renminbi has been gradually evolving as a globally accepted currency,? the bank said.
The renminbi is allowed in international transactions by several countries, including the US and the UK.
However, Sri Lanka?s decision to allow the currency highlights its strengthening relationship with China.
Beijing has forged closer political ties with Sri Lanka and has been the biggest source of foreign funding to the country in recent years. China is also playing a big part in helping Sri Lanka with reconstruction following the end of the country?s 25-year civil war two years ago.
Sri Lanka?s economy expanded 8 per cent last year, up from 3.5 per cent in 2009.
The country?s stock market was the best performer in Asia last year, although the main index is trading up just 3.7 per cent this year.
However, the strengthening of ties between Sri Lanka and China has raised concerns in neighbouring India which fears Beijing?s growing influence in Asia.
According to the Central Bank of Sri Lanka, the Indian rupee is not among the 13 other foreign currency transactions permitted in Sri Lanka.
Beijing has been encouraging the use of the renminbi as an international alternative to the US dollar.
Over the past two years renminbi cross-border trades deals have surged.
Much of the activity around the currency has focused on Hong Kong, initially chosen by the Beijing to act as a launch pad for the currency?s expansion beyond mainland China.
Banks and financial institutions have sought to cash in on growing demand for the currency by creating more renminbi-denominated products.
However, Beijing is yet to remove various restrictions that currently make it hard for foreign entities that hold the currency offshore from investing it on the mainland.
? The Financial Times Limited 2011
