Bilateral investment is also gaining importance, notably with the two recent Government-to-Government agreements, involving the establishment of an industrial park in both countries. The cornerstone to the strength of our bilateral economic relations is the ability to continually harness the synergies and economic complementarities that exists between our economies. The use of renminbi for trade settlement provides a natural hedge for businesses with renminbi obligations. It also generates cost savings and minimises exchange rate risks, in particular, it reduces the exposure to exchange rate fluctuations of a third currency. While the dollar will continue to remain an important currency for settlement of trade obligations, the availability of renminbi would provide companies an additional currency for such trade settlement. BIS central bankers’ speeches  1  The benefits to be gained can be significant given the large and increasing trade base with China which stood at RM167 billion in 2011. By undertaking the transactions in local currency, exporters and importers in China would be able to eliminate the hedging and conversion costs. The reduction in transaction costs for the exporters and importers will contribute towards more competitive pricing for both exporters and importers. The full potential benefits are however expected to be realised in stages. The benefits will rise as the trade volume settled in renminbi increases and reaches a critical volume in terms of size which will in turn allow for the realisation of economies of scale.
On the other hand, there are those who reject these arguments and argue that the reduced effectiveness of monetary policy at the ZLB and during a credit crisis makes this the only effective macroeconomic policy weapon at the current juncture. Whatever the resolution of this debate, however, the traditional arguments against activist fiscal policies seem likely to still obtain once normal times return. 2. The choice of monetary instrument. Given the above, monetary policy is likely once more to take on the primary role in short-term aggregate demand management once normal times return. But the apparent effectiveness of asset purchases at altering longer-term yields opens up the possibility that they could become part of the monetary toolkit in normal times. We argued in Section 3 that despite its apparent effectiveness, there were good reasons to return to exclusive reliance on a shortterm policy rate in normal times and after any asset purchases during the crisis have been appropriately unwound. 3. The monetary transmission mechanism. The crisis has brutally exposed the limitations of conventional macroeconomic analysis ignoring the role of financial intermediaries. While the existing literature contained a strand focussing on the role of financial frictions – including those on the broad credit channel – they generally focussed on those that arose from the behaviour of borrowers. The crisis has illustrated the need to take seriously the incentives facing the intermediaries themselves.