As enthusiasm to settle trade in Chinese Rmb grows, its usage is beginning to expand out from its traditional Asian markets. Sarah Rundell reports.
The Chinese renminbi (Rmb) is now the third-biggest currency for letters of credit (LCs) after the dollar and the euro, according to the latest Swift data.
Around 4% of LCs issued globally last year were denominated in Rmb. Meanwhile, banks estimate around 10% of all trade is now conducted in Rmb and forecast that this will rise to 20% in the next three to five years, as China’s share of world trade climbs; its portion of global trade is forecast to rise to 13% by 2026.
So far, most Rmb-denominated trade is in the Asia Pacific region between China and Hong Kong and China and Singapore. It is startling growth given that international transactions in Rmb have only been possible for three years. So far, most enthusiasm for Rmb trade finance has come from Asia-based companies selling into China.
Early analysis has shown that around 80% of Rmb-denominated trade has been “unidirectional,” with Chinese importers paying in Rmb but Chinese exporters still invoicing in dollars.
One explanation for the slow take-up amongst the mainland’s exporters has been regulation. The Chinese government only let a small number of companies export and invoice in Rmb in its initial trade settlement scheme set up in 2009.
A year later it was extended, and then in March this year authorities announced plans to reduce the bottleneck further by allowing all corporations to settle trade in yuan bar “blacklisted” companies that would still be prohibited.
Chinese exporters step up
There are other challenges in the process too. A lack of understanding and reluctance amongst Chinese exporters to upset the status quo is one.
“We found that 40% of our respondents on the mainland would rather be paid in Rmb than US dollars but never broached the subject,” says Alfred Nader, vice-president, corporate strategy and development at Western Union Business Solutions, which recently produced a report measuring the use of Rmb for trade.
“The main challenge for companies on the mainland is their ability to understand and navigate the complex regulations when exporting and invoicing in renminbi,” says Simon Constantinides, regional head of global trade and receivables finance for Asia Pacific at HSBC, which runs roadshows with the regulator helping mainland businesses grabble with the new concept, explaining the opportunity and the mechanics.
Bankers say the combination of growing awareness and the effects of extending the scheme are having a dramatic effect.
“The mix is changing. It’s more like 60/40 now – Chinese exporters are starting to use Rmb too,” says Neil Daswani, global head of strategic client coverage, transaction banking at Standard Chartered. Other changes are also helping to boost the market. Foreign companies are barred from financial markets in mainland China, making the job of accessing Rmb to pay Chinese suppliers tricky.
Now China’s central bank has set up swap agreements with 14 central banks in key trading markets ranging from Singapore to Kazakhstan, allowing foreign banks to supply yuan to their corporate customers. In another development, the steady rise of Rmb deposits in Hong Kong has led to a fledgling offshore yuan market where the currency can be accessed – transferred between banks, borrowed, lent and invested like any other currency.
That said, foreign companies are still wary about their ability to hedge their Rmb forex in Hong Kong’s still small and illiquid market.
Concerns about availability, the depth of the market and its ability to absorb large transactions, together with the strict documentation requirements for accessing onshore Rmb, has dulled enthusiasm to switch.
Michael Vrontamitis, head of product management at Standard Chartered, believes there are now more companies “prepared to take the plunge.”
He argues that the Hong Kong clearing market “is not a problem anymore”.
Estimates suggest the Hong Kong deliverable market has grown from US$1bn to US$3bn over the last year, allowing companies to take large orders without moving the market. In another development, Hong Kong’s, and to a lesser extent Singapore’s, foreign exchange markets are increasingly being used to switch China-bound commodity flows originally denominated in dollars into Rmb for the final onward hop onto the mainland; it seems that although commodities are priced in dollars, they are increasingly arriving into China in Rmb.
European access to Rmb
With London now on the road to becoming an offshore centre for Rmb, it will become easier for European companies trading with China to access Rmb.
Hong Kong has been the only offshore yuan holding centre since 2009 and London, the biggest forex market in the world, wants to become the currency’s hub in the west. It will enable corporates throughout the region to make and receive payments in Rmb and hedge their currency risk.
With a mind on building investment options for the growing pool of Rmb liquidity across Europe, HSBC sold London’s first Rmb bond in April – the three-year bond will trade on the London Stock Exchange. According to Swift, Britain is already the biggest player, outside mainland China and Hong Kong, in Rmb foreign exchange transactions.
But the process has only just begun. The total amount of Rmb deposits in Hong Kong doubled last year to Rmb630bn (US$100bn) but that only represents less than 1% of the deposit base on the mainland.
Corporations in and outside China are cottoning onto other benefi ts of trading in Rmb too.
Because of China’s capital account restrictions there is a cap on the amount of dollars Chinese companies can access to finance their trade requirements. This so-called foreign debt quota means dollars aren’t available on tap. It leaves many Chinese businesses struggling to access dollar-denominated LCs.
Rmb cross-border transactions are now exempt from the foreign quota requirement, which means that foreign companies exporting into China will be able to access to a much broader range of Chinese companies.
“For multinationals exporting into China this is a real incentive to use Rmb,” says Venkatesh Somanathan, director of regional trade product management at Deutsche Bank.
“If overseas companies want to expand and leverage their business opportunities in China, accepting Rmb payments will make it easier for their China buyers to do business with them,” adds StanChart’s Daswani.
For foreign companies trading with China, paying in Rmn is also cheaper, faster and puts managing foreign exchange rate risk in their own hands. Chinese corporates have tended to bump up the dollar cost of the goods they sell to foreigners in expectation that the dollar will fall against the Rmb.
Western Union found that Chinese exporters invoicing in dollars add around 3% to cover foreign exchange rate risk on a transaction. Rather than quoting the dollar spot price on a transaction, Chinese exporters forecast what the currency will be at the time of settlement, says HSBC’s Constantinides.
“The implied foreign exchange volatility is removed or at least more transparent to the buyer when the Chinese seller quotes in renminbi. Last year we know some clients found they saved between 3-7% by being invoiced in Rmb rather than dollars,” he says. Using Rmb is just as lucrative for Chinese companies. In one trend, bankers note that Chinese state-owned corporates are increasingly exploiting the cheaper source of finance on offer in Hong Kong to finance trade.
“Because of the lower interest rates, and in some instances better exchange rates in the offshore market in Hong Kong and Singapore, borrowing offshore is cheaper than onshore – this is helping to drive flows,” says Ravi Saxena, Citi’s head of trade for Asia Pacific.
For Chinese exporters, being paid in Rmb also improves their cash flow. Chinese authorities take about a week to process foreign currency payments but only a day for Rmb ones. Emerging market usage Emerging markets have led the way building the infrastructure to support more Rmb trade.
The China Development Bank, which still makes mostly dollar-denominated loans, has signed some agreements with Asean and Bric nations to settle trade in their respective currencies rather than dollars; estimates suggest that the Rmb’s share of regional Asian trade will swell to 50% by 2015. It is popular since cutting out exchange rate risk is a saving for small exporters supplying China, where costs are in local currency but payment in dollars; if the dollar falls, so do earnings although costs are unchanged.
The Rmb’s influence is also spreading to Africa, where Standard Bank predicts that 40% of African-Chinese trade will be in Rmb by 2015.
In Nigeria, where trade with China topped US$13bn last year, the central bank recently switched 10% of its foreign reserves into Rmb to reduce reliance on dollars and euros as invoicing currencies for trade.
Internationalisation of the yuan took an even bigger step recently when Japan and China announced direct trading of their two currencies. Only 1% the Y27.541tn worth of trade between China and Japan is settled in yuan, according to Japan’s Ministry of Finance.
Corporations say they are concerned about holding Rmb on their balance sheets until it is fully convertible; they don’t want the danger of being exposed to structural weaknesses in the Chinese economy. Some businesses also say it’s not necessarily in their interest to renegotiate benefi cial contracts or set up new, costly systems to pay in Rmb.
“For sure decisions won’t be taken overnight because any change in invoicing strategy takes a while, but most companies have started to consider and evaluate trading in Rmb,” says Saxena. Others point out that if the Rmb “appreciates too much” Chinese authorities may stall on the plan for the Rmb to become a free-fl oating currency.
In fact, the rising Rmb has led to suggestions that the enthusiasm to finance trade in the currency is more about an “appreciation play” than genuine trade finance.
Others argue that it’s only natural that the currency belonging to the world’s largest exporter and second largest economy becomes the currency that finances trade. GTR