By 2015, the renminbi could account for 20% of world trade with China, writes Liz Salecka.
China’s growth as a world trading power is spearheading the use of the renminbi (Rmb) as an international payments and trade settlement currency.
The currency is increasingly being used for export and import business conducted with China, and its adoption is growing in line with China’s own increasing volumes of global trade. Today it is the world’s 13th largest payments currency, having risen in the rankings from 20th position at the start of 2012.
“The Rmb is gaining acceptance as an international trade currency, driven primarily by the growth of China’s share in global trade,” explains Vishal Kapoor, head of north Asia structured trade, treasury and trade solutions at Citi, adding: “Over the next few years we are likely to witness a significant growth of trade settlement in Rmb driven by the expansion of offshore Rmb hubs like Hong Kong.”
“The Rmb’s growth is largely related to the position of China as the world’s largest exporting country and the second largest importing country,” adds Esmond Lee, executive director, financial infrastructure department at the Hong Kong Monetary Authority (HKMA). He explains that the ongoing expansion of China’s economy suggests that the currency still has a long way to go.
“If you look at the Japanese yen, which started to internationalise 30 years ago, it now accounts for about 30% plus of the country’s external trade. In 2012, about 11% of China’s external trade was in Rmb, indicating significant scope for further growth in this space.”
According to figures provided by Standard Chartered, the percentage of trade with China settled in Rmb reached 10.7% in the first six months of 2012, before rising to 12.3% in the third quarter, and then 13.9% in the fourth quarter. The Standard Chartered Rmb Globalisation Index (RGI), an industry benchmark that tracks the progress of Rmb business activity, revealed 62% year-on-year growth in January this year.
“Global trade between China and the rest of the world has grown from US$2.2tn in 2009 to US$3.87tn in 2012 and is expected to continue in a growth trajectory,” says Michael Vrontamitis, head of product management, east, transaction banking at Standard Chartered. “With this backdrop, we are confident that, by 2015, 20% of the world’s trade with China will be settled in the Rmb.”
Key drivers
A number of key initiatives have helped to promote the Rmb’s role in cross-border trade with China since regulations governing its use were relaxed.
Its origins as a trade currency stem from an early pilot scheme, set up by the Chinese government in 2009, in which 400 enterprises in five major Chinese cities were selected to trial its use.
“This scheme was expanded very quickly to other cities in China, and now covers the entire country. As a result, use of the Rmb as a trade settlement currency moved very quickly,” says Lee at the HKMA.
“Deregulation and regulation have opened up the market. Since 2012, we have seen all enterprises in China with an exports or imports licence – in any province or city – allowed to conduct cross-border trade in Rmb,” adds Jacques Ling, executive director, Asia trade product management at JP Morgan.
As a result there is now much greater corporate awareness and understanding of the value proposition presented by the Rmb as an invoicing currency – and this is driving demand.
“We are seeing an increasing number of large multinationals (MNCs) switch their invoicing to Rmb and this is creating a positive impact on other companies in the decision-making process,” says Vrontamitis. He adds that the Rmb’s growth also stems from increased confidence in it as an international currency, and the continued simplification of rules governing its use.
Certain industries such as commodities have been quick to embrace the Rmb, encouraged by local regulations and assisted by their greater bargaining powers in determining the currency of trade.
Ling points out that large Chinese importers of commodities have been able to dictate terms to exporters in countries such as Brazil and Australia and insist that the Rmb is used as the currency of trade.
Similarly, Citi’s Kapoor notes that large Asian importers can influence their suppliers: “Already, we have seen a fast transition by Chinese importers of commodities to the use of the Rmb as a trade settlement currency, and this is also being driven by regulations that encourage its use,” he says, adding: “We are also seeing more exports from China invoiced in Rmb.”
He explains that in such situations there has to be a commercial gain for both the buyer and the seller. Overseas buyers are more willing to move their settlement to Rmb if they can extract better terms from the Chinese exporters involved as long as they have access to liquid and relatively stable markets to hedge the foreign exchange (fx) risk. Chinese exporters, meanwhile, are willing to accept this switch as it eliminates fx volatility from their cashflows.
Rmb liquidity grows
Aside from the need to eliminate fx risks, another important consideration for both exporters and importers when determining the currency of trade is the cost of raising finance in that currency.
Today, there is much greater access to attractively-priced Rmb liquidity in less-regulated offshore markets, such as Hong Kong, and this is expected to encourage the currency’s use.
“By moving their trade to Rmb they can eliminate currency risks, and can also benefit from the opportunity to raise financing in Rmb in offshore markets like Hong Kong,” confirms Kapoor.
A recent pilot initiative on Rmb cross-border sweeping, which enables corporates to sweep their surplus cash from China to offshore subsidiaries or parent companies within an approved lending quota is also expected to boost the Rmb’s use for trade.
“This facilitates corporates’ ability to manage the Rmb within their global liquidity pool and fulfill their offshore Rmb trade payment needs more effectively,” says Vrontamitis. “This pilot initiative provides another channel to move Rmb liquidity offshore to grow the offshore Rmb liquidity pool.”
Facilitating overseas payments
Many European countries including the UK, France and Germany have made significant progress towards adopting the Rmb for trade with China, while Australia too has witnessed substantial growth in Rmb payment volumes.
This movement has been supported by the improved ability of overseas banks to make and/or receive bank payments in Rmb via Hong Kong.
According to Lee at the HKMA, overseas banks can now take advantage of greater opportunities to use a correspondent bank based in Hong Kong. Many large European, US and Asian banks have subsidiaries or branches in Hong Kong, which they can use as correspondent banks for Rmb payment activities. Having a local presence also makes it easier for them to engage other banks in Hong Kong for this purpose.
Overseas banks can also participate in the Hong Kong payments system which facilitates cross-border payments in a number of currencies, including the Rmb. Use of the system for trade payments in Rmb commenced in 2009.
“Hong Kong has played a key role in facilitating payments for both inter-regional and intra-regional trade, acting as an intermediary in such transactions,” says Lee, pointing out that at present, about 80% of payments (including trade settlement payments) are attributed to Hong Kong, 5.3% to the UK, 4% to China and 3.1% to Singapore.
He adds that, of the Rmb2.6tn of trade settlement handled by banks in Hong Kong in 2012, about Rmb2.3tn went through the Rmb payments system in Hong Kong for cross-border payments.
The significant role of Hong Kong as an offshore Rmb trading hub is also noted by Ling: “Hong Kong was a fast-mover in this regard as a result of the pilot scheme that took place between China, Hong Kong and Macau a few years ago. It has developed and now offers highly efficient and reliable clearing mechanisms and platforms to facilitate trade settlement with China.”
Co-operative arrangements
Co-operative arrangements entered between Hong Kong and other countries are also helping to drive the Rmb’s acceptance as a trade settlement and payments currency globally.
In January 2012, the London–Hong Kong Forum was launched to spur co-operation on the development of international Rmb business. The forum brings together leading banks based in London and Hong Kong to discuss ways of promoting greater interest among European corporates in using the Rmb for transactions with mainland China, as well as ways of facilitating Rmb-denominated transactions.
In July, a similar arrangement was entered between Hong Kong and Australia to help develop offshore Rmb business opportunities, raise awareness of the Rmb among Australian corporates and enhance financial sector links between Hong Kong and Australia.
“Australia has become much keener on the use of the Rmb as a trade settlement currency, and this has been encouraged by the co-operative arrangement we have in place,” says Lee at the HKMA. “It is possible that we will enter further co-operative arrangements with other countries in the future.”
Impact of intra-regional trade
Looking to the future, use of the Rmb as a trade settlement currency is also likely to be boosted by the growing volumes of intra-regional trade between China and its neighbours.
“In the past, Asian trade was driven by China exporting directly to Europe and the US and this influenced the currency of trade,” says Kapoor at Citi. “However, today, intra-regional trade is growing, boosted by Taiwanese and Korean corporates which are fast-expanding their presence by increasing manufacturing out of their subsidiaries in China. If this trend continues, there will be a greater focus on the Rmb as a settlement currency.”
“China conducts a huge amount of trade with neighbouring Asian countries including Japan, Hong Kong, Korea and Taiwan,” adds Ling at JP Morgan, noting that Swift recently announced that Rmb payments made by Taiwan have increased by 120% over the last six months.
Since 2008, the Central Bank of China has also been progressively entering bilateral currency swap agreements with a number of countries regionally, including South Korea, Australia, Hong Kong, Singapore and Malaysia. It has, for example, entered Rmb360bn of swaps with South Korea and Rmb200bn of swaps with Australia.
“This has encouraged greater liquidity in Rmb as a trade settlement currency in these markets,” says Ling. “The fact that two thirds of China’s bilateral currency swap agreements are with these Asian countries demonstrates how much value and importance China places on its Asian partners.
“In Asia we need an anchor currency that represents the entire region in the same way that the US dollar represents America and the euro represents the eurozone countries.”
Barriers to growth
However, there are also still some barriers to the growth of the Rmb, including the need to secure greater corporate awareness of what its use can achieve.
“The largest impediment to companies considering the Rmb as an invoicing currency remains the lack of understanding of what is possible today,” says Standard Chartered’s Vrontamitis. “With enough outreach and education, companies can better understand how they can potentially save an average of 2 to 3% on their costs.”
Vrontamitis believes that banks also need to play an advisory role in ensuring that adoption of the Rmb by corporate clients is well-managed as this is likely to call for a system set-up and operational changes, as well as enhancements to accounting and treasury systems.
“Corporates should also have conversations with their trade counterparts to discuss the opportunities and re-agree pricing on the basis of a win-win arrangement with better fx risk management, cost savings and processing efficiency,” he concludes.
Capitalising on western issues?
While the US dollar, euro and sterling have traditionally dominated as trade currencies, there are growing suggestions that the current economic uncertainty experienced in some major western economies is creating a stronger case for the Rmb.
“Companies which operate with different working capital currencies will be better hedged than those which deal solely in US dollars and this becomes very apparent when the market experiences US dollar liquidity shortages,” says Standard Chartered’s Michael Vrontamitis. “This makes the Rmb an even more compelling proposition for businesses which have business dealings with China.”
At Citi, Vishal Kapoor paints an even stronger picture for the Rmb, pointing out that its use as a trade settlement currency took off after the 2007/08 financial crisis, “Global and regional economic and financial events do have a lot of significance,” he says. “Already, we have seen the settlement of trade move to currencies that are less volatile. Volatility in western currencies will act as an incentive to shift to the Rmb.”
Meanwhile, Jacques Ling at JP Morgan points out that there are strong market expectations that the Rmb will appreciate in value in the future, which bodes well for exporters that use it. “It has appreciated significantly over the last few years, and our house view is that it will continue to appreciate moderately between 1 and 2% up to the end of this year,” he says.
He nevertheless notes that the US dollar and euro are still used as trade settlement currencies by many multinational corporations (MNCs), whose internal treasury policy traditionally dictates this.
“However, there is growing interest in using the Rmb from those US and Europe-based MNCs that have set up production facilities in China and hence have operating costs in Rmb,” he says.
