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| By Sherie Morais, head of transaction services origination for Middle East and Africa |
Within the next 10 to 20 years, the RMB is going to become prominent on the international stage.Companies trading with China who rely on today's major currencies should look at RMB-denominated trade. That shift will have consequences that companies need to identify now if they are to successfully embrace this change.
A viable, well-structured RMB strategy will help them in a number of important areas, such as unlocking and redeploying working capital to maximise returns, reducing external financing needs, understanding and managing operational and credit risk and improving the visibility of their company's cash positions.
This is because global trade with China is only going to go in one direction - upwards. The Chinese economy is projected to grow by about 8 per cent annually over the next four years, according to data from the Economist Intelligence Unit. That's not as healthy as in recent years, but it is still much stronger than the economies of the US, the EU and Japan, where growth is expected to be about 2 per cent or less.
The RMB is not a world currency yet, and the full implications of its internationalisation are not clear, but the march has started.
Trade in the offshore renminbi (CNH), which may be a precursor to making the RMB fully convertible, has grown dramatically. In Hong Kong, where almost all CNH trade takes place, CNH -denominated deposits now total some CNH 500 billion (about USD78 billion), compared with virtually zero four years ago.
Use of the RMB is spreading. A property company made China's first RMB-denominated equity initial public offering in Hong Kong last year. The first RMB-denominated bond issued outside China was listed on the London Stock Exchange in early 2012, and the City of London has been in talks with China over making London a western hub for RMB trading. Meanwhile, trade in the onshore RMB, also known as CN Y, is slowly being liberalised.
Bringing the RMB into corporate trade and investment plans is essential if companies are to maximise their potential for developing new business in Asia. Companies that take active steps to do so, stand to benefit from potentially huge advantages of the internationalisation of the RMB.
Many Chinese firms will want to settle crossborder transactions in RMB in order to reduce their costs and currency risks in the future. Foreign firms ready to do business on that basis will be in a good position to negotiate favourable terms with their partners in China, as well as potentially mitigating their own currency risk. For buyers from China, goods can be priced and settled in RMB without any mark-up from foreign exchange.
Companies will also benefit from the flexibility of adding an extra currency to their portfolio - a currency that could prove to be as strong as, or stronger than, the existing major trading currencies. While the US dollar and the euro have both shown weakness during the financial crisis, the RMB has remained relatively stable.
The growth of the RMB as an international currency will be accompanied by the expansion of RMB-denominated instruments, including hedging tools, that will enable companies to better manage their RMB liquidity. Holding an RMB cash position is a natural hedge for trade flows with China.
All this means firms need to address their RMB strategies as soon as possible. That is particularly true for companies that trade heavily with China – such as those in the retail and commodity industries – as well as firms keen to diversify their investment portfolio and enjoy the potential appreciation of the RMB.
Businesses should consider a number of key questions:
Do your opportunities in China mean you will have a long-term commitment there?
Does China account for a significant share of your business, and is that likely to increase?
If you bid for a large order from a Chinese state-owned enterprise, will it make you more competitive if you can settle in RMB?
If you pay Chinese firms supplying such a contract – who may be suffering due to dollar depreciation – in RMB, will it make those suppliers more loyal to you, or help you to access more suppliers?
Can the RMB be exchanged and used as a hedging tool locally?
There is still time to develop an RMB strategy, but it is an element of planning that needs to be placed firmly on the corporate radar now. The sooner companies start planning, the sooner they will reap the benefits as the RMB evolves internationally in coming years.
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