Beijing and Jakarta Expand Currency Settlement Deal Beyond Trade to Full Financial Integration

China-Indonesia Currency Agreement: A New Chapter in De-dollarization

Beijing and Jakarta Forge Landmark Deal to Reshape Regional Trade Flows

JAKARTA, Indonesia — Standing side by side in Jakarta's presidential palace on Sunday, Chinese Premier Li Qiang and Indonesian President Prabowo Subianto witnessed a watershed moment in bilateral financial relations as their central bank governors signed an agreement that significantly expands the scope of local currency settlements between the two economic powerhouses.

The memorandum of understanding, signed by People's Bank of China Governor Pan Gongsheng and Bank Indonesia Governor Perry Warjiyo, represents a dramatic expansion of an existing framework, extending bilateral currency cooperation beyond trade and direct investment to encompass the entire capital and financial account — a move with far-reaching implications for regional financial architecture.

"This agreement transforms what was once a limited trade settlement mechanism into a comprehensive financial corridor," said a senior monetary policy advisor present at the signing ceremony. "We're witnessing the construction of parallel financial infrastructure that operates increasingly independent of the dollar system."

Breaking the Dollar Dependency

The expanded agreement builds upon foundations laid in September 2020, when the two countries first established a limited local currency settlement framework covering only current account transactions and direct investment. That initial framework, formally launched in September 2021, designated a select group of commercial banks as Appointed Cross Currency Dealers — eight in China and twelve in Indonesia — authorized to facilitate local currency transactions.

Sunday's agreement dramatically widens this pipeline, encompassing all capital and financial account transactions including portfolio investments, loans, derivatives, and mergers and acquisitions.

"What's groundbreaking here isn't just the expanded scope," noted a Jakarta-based currency strategist. "It's the shift to mandatory direct CNY-IDR quotes, the ability for banks to run on-balance-sheet books in each other's currencies, and the mutual recognition of regulatory frameworks. They've effectively removed the dollar as intermediary."

The timing is particularly significant. Indonesia joined the BRICS bloc in January 2025, signaling a strategic pivot that aligns with broader de-dollarization efforts. Meanwhile, China continues to grapple with the reality that the renminbi accounts for just 3.5% of global SWIFT payments despite being the world's second-largest economy.

Market Implications Beyond the Headlines

For investment professionals, the agreement's technical details reveal significant market implications obscured by diplomatic language.

The new framework allows ACCDs to maintain on-balance-sheet CNY-IDR books, offer sophisticated hedging products, underwrite local currency bonds, and access each other's payment systems — China's Cross-Border Interbank Payment System and Indonesia's BI-FAST.

Market analysts project the CNY-IDR spot trading volume could triple to approximately $1 billion equivalent per day within 12 months as state-owned enterprises migrate their invoicing practices. The removal of the dollar leg in these transactions is expected to reduce realized volatility by roughly 30% based on 2024 correlation data, leading to tighter bid-ask spreads and lower hedging costs.

"The agreement creates a true trade currency pair rather than a synthetic cross," explained a Singapore-based head of FX trading. "Indonesian exporters have been at the mercy of dollar funding costs and volatility even when trading with China. This agreement changes that fundamental equation."

The "Panda-Komodo Conduit"

Perhaps most significant for capital markets is the opening of what insiders are calling the "Panda-Komodo conduit" — a direct pathway allowing Indonesian state-owned enterprises to tap onshore Chinese yuan markets while giving Chinese corporations operating in Indonesia's booming nickel sector access to rupiah funding without dollar swaps.

Companies likely to benefit from this arrangement include Indonesia's state utilities and resource giants such as PLN, Inalum, and Pertamina, which can now issue yuan-denominated debt directly to Chinese investors.

The agreement also paves the way for Indonesian rupiah bonds to become accessible to China's massive 10 trillion yuan money-market complex if Bank Indonesia grants settlement accounts to Chinese custodians — a decision still pending but widely expected.

"This creates a completely new carry trade opportunity," observed a bond portfolio manager at an Asian sovereign wealth fund. "China's investors gain access to Indonesian yields without dollar hedging costs, while Indonesian issuers can tap China's deeper liquidity pools. It's a win-win that bypasses the traditional Western financial architecture."

Winners and Losers

The agreement creates clear sectoral winners and losers in equity markets. Indonesia's nickel and electric vehicle supply chain companies — including Nickel Mines, Vale Indonesia, and CATL's joint ventures — stand to benefit significantly as CNY invoicing aligns with Chinese battery manufacturers' cost structures, potentially shaving 50-120 basis points in foreign exchange costs.

Indonesian banks with ACCD status, such as BCA, BMRI, and BNI, are positioned to capture new fee income streams from foreign exchange services, custody operations, and sticky yuan deposits, with analysts estimating a 3-5% uplift to non-interest income by 2026.

Chinese fintech platforms and QR payment networks, including UnionPay and Ant-backed Dana, also stand to benefit as API connections between BI-FAST and CIPS enter testing phases, with cross-border QR functionality expected to go live in the first half of 2026.

"The real story here is the retail payment corridor that's being established," said a fintech venture capitalist active in Southeast Asia. "When ordinary Indonesians and Chinese tourists can scan each other's QR codes without currency conversion, that's when de-dollarization moves from government policy to everyday reality."

Part of a Broader Regional Shift

Indonesia's expanded currency settlement cooperation with China is far from an isolated initiative. Jakarta has established similar frameworks with Malaysia, Thailand, Japan, Singapore, South Korea, India, and the United Arab Emirates. As of mid-2024, Indonesia's total local currency transaction volume reached $4.7 billion with 3,850 users.

The Association of Southeast Asian Nations agreed at its May 2023 summit to promote regional connectivity and local currency transactions, developing a comprehensive framework that builds on the success of existing bilateral arrangements. The Local Currency Settlement Framework between Thailand and Malaysia, launched in March 2016 and later joined by Indonesia in 2018, has demonstrated measurable results, with transactions between Indonesia and its framework partners reaching $2.1 billion in early 2023.

Challenges and Execution Risks

Despite the agreement's ambitious scope, significant implementation challenges remain. China's yuan, while increasingly internationalized, is still not fully convertible, creating asymmetric risks. A sudden tightening of capital controls by Beijing — as occurred briefly in October 2024 — could leave Indonesian exporters stranded with yuan they cannot easily convert.

The agreement also creates regulatory asymmetry, with Indonesia liberalizing faster than China. Outflows from China into Indonesian rupiah assets face fewer frictions than inflows in the opposite direction, potentially creating imbalances.

Geopolitical tensions, particularly around territorial disputes in the South China Sea, represent another risk factor that could trigger risk-off sentiment toward the rupiah and drive corporations back to dollar invoicing.

Finally, the exclusive dealer model limits participation to just 20 banks across both countries, potentially disadvantaging small and medium enterprises without established relationships with ACCDs.

Three Scenarios for Growth

Market analysts have mapped three potential scenarios for the agreement's impact by 2028. In the base case, the percentage of China-Indonesia trade settled in local currencies grows from 6% currently to 18%, with daily CNY-IDR spot volume reaching $1 billion.

Under a bullish scenario, local currency settlement could reach 30% of bilateral trade, with spot volumes approaching $1.8 billion daily. A more conservative bear case sees more modest growth to 10% of trade, with volumes of $500 million daily.

"The agreement's success ultimately depends on corporate adoption," commented a treasury management consultant who advises Southeast Asian exporters. "Regulatory infrastructure is necessary but not sufficient. Companies need to see clear benefits to change entrenched dollar invoicing habits."

Investment Opportunities

For professional investors, the agreement creates several actionable opportunities. Currency strategists point to potential in FX carry trades receiving one-year Indonesian rupiah interest rate swaps versus paying Chinese yuan swaps, capturing a spread of approximately 290 basis points.

Credit investors may find value in three-year Komodo bonds (yuan coupon, rupiah principal) issued by blue-chip Chinese mining companies, which currently price 40-60 basis points wider than comparable offshore yuan paper.

Equity investors are advised to overweight Indonesian banks with ACCD status while underweighting dollar-centric exporters that lose their funding cost advantages.

The venture capital space sees opportunity in local financial technology startups facilitating CNY-IDR hedging for small and medium enterprises — a total addressable market that will expand alongside settlement volume.

As one regional asset manager summarized: "This isn't just about diplomacy or symbolism. The agreement creates the infrastructure for the largest fully capital-account-open local currency settlement scheme globally. Smart money is positioning now, before local currency liquidity premia compress."

For the immediate future, market participants are watching several key catalysts: Bank Indonesia's forthcoming circular on capital-account local currency transaction procedures, rumored to be released in the third quarter of 2025; Indonesia's first yuan-settled IPO on the Indonesia Stock Exchange, expected in November; and the launch of ASEAN's integrated QR payment pilot in early 2026.