Banks report increasing volumes of Rmb trade settlement business, but growth could slow if importers and exporters are unable to hedge their currency risk. Rebecca Spong reports.


From the perspective of the Chinese corporate, the appeal of settling crossborder trade deals in renminbi (Rmb) is fairly straightforward.

China is a huge global trading power, and its corporates would far prefer close their trade deals in the same currency as they use to finance the domestic costs of their companies rather than have to convert their funds into US dollars. Paying in the same currency cuts out the hassle of dealing with foreign exchange issues and some report that paying in Rmb even speeds up the time it takes to complete a trade transaction.

Given that the Chinese currency is generally on an appreciating trajectory, the cost of paying invoices in Rmb rather than US dollars is clearly the favourable option for Chinese importers. Economists will also talk of the centre of gravity for trade shifting from Europe and the West back towards the East.

The increasing internationalisation of Rmb is a source of much pride for the Chinese, happy to regain their position as a central force in world trade. With such benefi ts in mind, the Chinese government tentatively launched its pilot Rmb trade settlement scheme in 2009. Since then the growth has been rapid. In just the first quarter of 2011, 7% of China’s trade was redenominated in Rmb, compared to 0.4% of trade in Q1 2010.

Total cross-border Rmb transactions reached Rmb506.3bn (US$77.7bn) in 2010, while transactions for the fi rst quarter of 2011 reached US$55.3bn, according to official Chinese government statistics.

The Rmb has already overtaken the pound sterling in its use as a settlement currency, and according to HSBC research, traders are expecting it to be one of their top three settlement currencies this year. Indeed HSBC goes as far as to predict that half of China’s trade with the emerging markets will be settled in Rmb in the next two to three years.

Standard Chartered foresees that by 2015 Rmb trade settlement volumes will reach Rmb5.6tn or US$1tn.The US debt crisis will no doubt add a greater sense of urgency to China’s desire to see Rmb become an international currency. Beijing is increasingly concerned about the potential long term depreciation of its huge holding of US dollar assets.

The country holds US$3.2tn in foreign exchange reserves, of which 70% is estimated to be in US dollars. Banks are eager to provide Rmb trade settlement solutions, but given that the currency is not yet fully convertible and cannot be effectively hedged, there is a question mark over how big the market can grow.

Furthermore, the market is still swayed in favour of financing imports into China rather than Chinese exporters receiving Rmb in payments. This balance between imports and export deals is also something that is beginning to be addressed.

The appeal in China

Trade settlement in Rmb is clearly gaining momentum among Chinese corporates. Under the original pilot scheme, just five Chinese cities were approved to carry out Rmb transactions.

Since 2009 the scheme has been gradually expanded and in August this year the government announced it would cover all provinces in the country. It also revealed it would allow crossborder direct investment in Rmb.

Typically the majority of the initial deals financed in Rmb were for exports into China, with Rmb fl ows leaving mainland China, fulfilling the government’s aim of internationalising the currency. The clear advantage for the Chinese importer is the favourable FX curve.

With the Rmb appreciating, the company doesn’t want to pay its import bills in US dollars and pay unnecessary foreign exchange costs. “For companies in China, trade fi nancing imports in US dollars would typically consume their bank’s limited foreign debt quota,” says Venkatesh Somanathan, Deutsche Bank’s head of trade finance in Singapore, and director, regional trade product management Asia.

“This is where closing a deal in Rmb helps as these short-term transactions do not consume their foreign debt quota,” he adds.

With this in mind the results of a recent HSBC China survey released in July this year which found that almost 80% of Chinese companies were planning to trade in Rmb should not come as a huge surprise. The survey gauged the opinions of 1,300 companies in 18 mainland Chinese cities, and found that 45% of the companies without experience of Rmb cross-border trade settlement have plans to adopt Rmb in their future crossborder trade.

A further third of respondents said they would choose Rmb depending on pricing and services provided by banks. Just 22% said they had no plans to develop Rmb products.

Yet, despite the popularity of Rmb among Chinese companies, the HSBC survey found that one of the problems they faced was convincing their foreign counterparty that abandoning the dollar and trading with Rmb was a good idea.

Close to 40% of respondents without Rmb crossborder trade settlement experience said that their overseas partners did not accept Rmb, citing reasons such as difficulties in obtaining Rmb to pay invoices or the overseas partner lacking a use for the Rmb once it was received.

They also reported a lack of awareness about Rmb trade settlement and insuffi cient support from local banks as additional limiting factors.

For the foreign trade partner, the benefi ts of signing up to Rmb trade settlement really comes down to which side of the trade flow you are.

“If you are an exporter selling into China then the FX curve is generally good for them – they are happy to sell and benefit from the appreciating yield curve,” notes Somanathan at Deutsche.

“For importers importing from China and making payments in China in Rmb – then the curve is against them and as a result the desire to redenominate their imports into Rmb is not very high.

“This is a position that occurs today in the Rmb FX market, but things could potentially change, in response to which market participants could realign themselves,” he adds.

For the banks offering Rmb settlement services, it has so far been an easier sell to get the foreign exporter on-board rather than the foreign importer. At Standard Chartered, roughly 60% of its Rmb deals are import transactions into China, compared to 40% of export transactions.

However, despite this import-favoured trend, the market is beginning to see a discernible shift towards increasing the number of export Rmb transactions.

“Feedback from the regulators is that there needs to be a rebalancing of the Rmb import transactions vs export transactions,” explains Mike Vrontamitis, head of product management North East Asia, transaction banking, at Standard Chartered.

“The reason for favouring imports to China over exports from China in the fi rst phase is linked to the desire to internationalise the currency and get Rmb into offshore destinations such as Hong Kong. There were only 400 exporters in the pilot scheme, but this has now been ramped up to over 67,000.”

Importers getting a better deal

Other market observers are seeing a shift towards more non-Chinese importers paying for their goods in Rmb. “Going forward, we will soon see a new trend emerge where more Chinese enterprises will expect their trading partners to accept payment in Rmb as well,” comments Marcus Lenz, financial institutions, product management at Commerzbank.

“This will also be very important in the overall scheme as a balanced Rmb fl ow to and from China is necessary to establish Rmb as a leading currency for trade settlement,” he adds.

Bankers also argue that there are some tangible benefits to the importer that go beyond just being the right side of the FX curve. For example, if the HSBC’s newly-appointed head of trade and supply chain in the Middle East and North
Africa, Tim Evans, also observes that a corporate’s ability to accept Rmb as payment can help when negotiating prices.

HSBC opened dedicated RMB accounts at branches in the UAE in late July with the aim that customers can receive as well as pay in Chinese currency.

“Historically, importers in the UAE would be billed by their Chinese exporters who would bill them in US dollars. These were predominantly medium sized factories in the Guangzhou area of Southern China, which didn’t have the negotiating power to demand settlement in another currency. They were also often not in a position to undertake advanced currency hedging – they didn’t have the required level of infrastructure within the company to always effectively manage this risk.

“To make up for volatility in exchange rates, where possible, they would add to the invoice price to cover for the inconvenience of having to convert payment back into Rmb without this risk being appropriately hedged.”

Now, Evans notes, this no longer has to be the case. If the importer can offer payment in Rmb, the foreign company is in the position to ask for quotes in US dollar and Rmb, and select which one would suit them best.

Being able to pay in Rmb can also help widen the variety of Chinese trading partners the importer can source goods from.

Growth areas

The appeal of trading in Rmb is beginning to spread beyond its initial Hong Kong and Asean region. Corporates in Europe are expressing interest, explains Somanathan at Deutsche. “Where we are seeing signifi cant amount of traction outside of Asia is in Europe. We have manufacturers in Germany and Italy who want us to get them onto the Rmb platform.

We are also having regular orientation programmes on Rmb for Europe to bring them up to speed with the Rmb initiative. There has been some serious interest from large firms in Amsterdam.” Commerzbank also reports strong interest in Germany. With China having overtaken the US as Germany’s number one export market outside
Europe, Rmb financing opportunities are set to grow further.”

The volume of Rmb for trade settlement has increased tremendously from Rmb18.35bn in March 2010 to Rmb360.32bn 12 months later,” comments Koll. Take-up has been perhaps slower in Latin America, although deals have been closed in the region; Peru being the first country to open an Rmb denominated trade settlement account, according to the China Daily newspaper

This lack of take-up is due to a number of factors. Latin America’s trade fl ows are dominated by commodities, and there is a sentiment in the market that Rmb trade settlement is more suited to the trade of manufactured goods as opposed to commodities.

Commodities are traded in US dollars on international markets, making any payment received by the larger commodity exporters in Rmb subject to market volatility. There has also been concern among some Latin American central banks about China’s tight capital controls and this has put some off risking significant amounts of their reserves in a currency that is not freely convertible.

Brazil has been relatively open to the idea of paying and being paid in Rmb, accepting that the growth of the Rmb is an almost inevitable trend. In a press conference in May, president of the Brazil central bank, Alexandre Tombini commented that the internationalisation of currencies such as the Rmb is “inexorable”.

Ultimate limitations

There have been many predictions about the growth of the Rmb’s use in trade settlement as well as much speculation about the currency becoming the new global reserve currency. But ultimately it is hard to fully grasp yet whether the use of Rmb in trade will become as widespread as thought.

One London-based banker remarked to GTR that some of the estimations for growth of Rmb trade settlement over the coming years are “unrealistic”. There are a number of limitations the market will have to overcome to fully realise the potential of Rmb trade. The Rmb trade settlement programme is still very much in the pilot stage, with the Chinese government tentatively expanding the programme.

This means regulatory issues are changing rapidly, making it hard for banks and clients to keep up to date with the latest requirements imposed by the Chinese government. Banks have also noted that they are just getting to grips with the processing of Rmb transactions and that there is still a lot of manual work required for each transaction.

Somanathan at Deutsche comments: ”The guidelines insist that Rmb settlements can only be made for genuine trade transactions and FIs or banks have to be satisfied that the underlying transaction is trade-related orapproved current items.
“This creates a high level of manual processing involved in such transactions, as they cannot be processed straight through; as a result more time will be taken to address these transactions in comparison to transactions in other unrestricted currencies.”

Furthermore there is the issue for banks of how to convince clients to experiment with Rmb denominated deals. Neil Daswani, regional head of transaction banking, North Asia at Standard Chartered comments: “One of the biggest obstacles is inertia. It is much easier to stay within your comfort zone, irrespective of being an exporter or importer or the geography you are in, sometimes it is easier to preserve the status-quo.”

And finally there is the issue of the nonconvertibility of the Rmb, particularly when it comes to persuading foreign importers to use Rmb as an alternative trading currency. As HSBC’s Evans points out: “There will come a stage when importers in the UAE will want to effectively hedge their currency risk if they are paying sizeable invoices in Rmb.

“What is currently happening is taking the currency risk away from the Chinese factories, and moving that risk onto the importer outside China. The importer doesn’t mind this if it is only a small portion of their business but once it becomes a critical part of their business, the ability to effectively hedge the currency risk will be something that will become increasingly important.” It is this issue of hedging Rmb currency risk that will make the task of increasing the number of import transactions compared to export transactions potentially difficult in the coming months. GTR

The corporate perspective

For European corporates doing business in China, Rmb settlement is of growing importance. Shannon
investigates what companies have to gain.w

With Chinese businesses becoming increasingly eager to settle trade in Rmb, European corporates operating in China are being prompted to meet this demand. “The whole world of manufacturing in China has moved to the cost base being more or less entirely in Rmb,” says Paul Broadhurst, CEO of Technetix, a British company which designs and manufactures broadband solutions, and has been manufacturing in China for the past two decades. “We’ve got vendors in China, and we settle to a Chinese bank. In this scenario we would want to change [from US dollars] to settle in Rmb,” Broadhurst explains.

The benefits

The advantages of settling cross-border trade in Rmb are becoming increasingly evident, with a reduction in transaction costs topping the list of benefits for European companies. “Overseas companies that change their invoice currencies from euro, US dollar or pound to Rmb when paying into China, can effectively save foreign exchange transaction costs,” says Ben Chan, senior vice-president for business planning and strategy at HSBC in Hong Kong.

Moreover, Chinese companies, which are often concerned about US dollar and Rmb currency fluctuations, have been known to charge their overseas counterparts a premium to offset any potential losses in the event of currency variation. By paying in Rmb, European companies are able to cut away that fluctuation, and may even be able to ask for a price discount as a result.

Additionally, with an Rmb account, companies are able to perform direct currency conversions, which may further reduce their costs.

“In the past, when you actually took in the currency commissions of two transfers [pound to US dollar or euro to US dollar, followed by dollar to Rmb], it basically added about 2% to the actual transaction, which wiped out the entire saving we would have gained,” says Technetix’s Broadhurst.

“This has been the standing problem for the last three or four years, and has been the subject of ongoing discussions with our bank.”

Additional benefits for companies looking to settle in Rmb include the ability to develop a diversified currency portfolio (by keeping Rmb offshore), and to hedge their currency positions. Companies can either hedge their payables with their receivables, or hedge their assets with their liabilities.

“There have already been a number of European companies – such as Unilever and Volkswagen – who have successfully raised Rmb bonds offshore in Hong Kong,” says HSBC’s Chan.

Client reluctance

Despite the encouragement from banks to trade in Rmb, corporates are still hesitant to do so. This is due to a lack of understanding of the currency, as well as challenges which businesses feel banks still need to address.

Currency appreciation remains a major concern as companies focus on their potential short-term losses.

“Our customers are still reluctant to pay in a currency they don’t know much about and which they’ve heard will appreciate against the dollar in the future,” says Pascal Serre, vice-president, head of financial solutions at Alcatel-Lucent APAC, a Chinese exporter.

“Since our customers are mainly domestic telecom operators, their revenues are not at all linked to the Rmb, and they are afraid that the currency may appreciate a lot,” he says, adding that an additional deterrent to corporates is the Rmb’s high interest rates, which top the dollar’s. Nevertheless, corporates are keen to determine if there are additional elements to their trade business that can be accomplished in Rmb settlement.

“Now that we can have an Rmb account to do all our currency conversions directly, the next thing we’re trying to establish is if we can do forward booking transactions,” says Technetix’s Broadhurst.

“For a company controlled from Taiwan or Hong Kong, where they would want to settle in US dollars outside China, we would want to have a US dollar value forward booking which was linked to the Rmb value.” Stéphane Jallat, managing director of Solairedirect, a French producer of solar power, agrees that his company’s decision to trade in Rmb would be subject to forward currency bookings.

“We would rather work in Rmb and cover ourselves forward if we were given a price in Rmb and euro forward cover was available,” he says. GTR