The mooted internationalization of the renminbi as a trading currency depends on the one substantial variable: foreign importers won’t snub it, in favour of the dollar, for trade-invoicing purposes, given the prospect of a structurally appreciating Chinese currency. These fears gathered pace in 2011 after the total volume of renminbi-settled deals fell 2% quarter-on-quarter to Rmb583 billion, after the currency depreciated in the global market sell-off of that year.
The sell-off exposed fears that few multinational companies had chosen to use the currency for transactional purposes and highlighted the potentially speculative nature of the market.
However, during the past 18 months there is growing evidence this was a cyclical trading blip in a structural bull market in corporate demand for the China currency, as trading with Chinese suppliers and customers continues to be an attractive proposition for overseas companies.
Wages in China have risen 20% in the past year, increasing the purchasing power of China’s huge consumer base. Meanwhile, China has surpassed the US in terms of its trade volumes, having conducted trade worth $3.87 trillion in 2012 compared with US volumes of $3.82 trillion.
China’s economic growth might have slowed a little recently, dropping to 7.8% in 2012, but the rate of growth is still much greater than the sluggish growth in the UK, Europe and US. The OECD has forecasts that China’s growth will rise to 8.5% this year and in March predicted that China will overtake the US to become the world’s largest economy by 2016.
Against this backdrop, many overseas companies continue to focus on growing their trade with Chinese counterparties. However, those companies are moving away from their traditional invoicing models and are choosing to transact with their Chinese trading partners in renminbi (RMB).
In the past, companies trading with counterparties in China had no choice but to do so in US dollar, but since China began internationalizing its currency, trade in renminbi (RMB) has been steadily growing.
More than 10% of China’s trade is settled in RMB, and this figure is expected to soar during the next couple of years, with HSBC predicting it could be as high as 30% by 2015.
The ability to transact in RMB has only been available for a couple of years. A pilot scheme for cross-border trade settlement in RMB was launched in 2009, allowing companies in selected cities in mainland China to trade with companies in Hong Kong, Macau and Asean member countries.
In 2010, the scheme was expanded to cover 20 provinces and cities on the Chinese mainland, and it now covers all overseas locations. A pilot programme for RMB trade settlement for individuals and small businesses is under way.
Since then, further initiatives have been put in place to simplify the requirements for trade documentation for RMB trade. It has also become easier for companies to hedge their foreign exchange exposures, with companies now able to do so using deliverable forwards.
In the past, RMB exposures could only be hedged using non-deliverable forwards. Hedging has also become cheaper as the markets have moved away from expecting the Chinese currency to appreciate against the dollar.
Peter McIntyre, HSBC’s head of UK trade, points out that Hong Kong continues to be the largest and best offshore market for RMB hedging and credit products – but this is changing.
“China is in the process of widening the network of clearing centres outside the mainland, encouraging the development of new markets,” says McIntyre. “Taipei recently began accepting renminbi deposits, for example, while Beijing has appointed a clearing bank in Singapore and negotiations continue with London.”
The availability of RMB trade settlement is only one part of the equation. For this model to take off as a mainstream choice, there also has to be a substantial incentive for overseas companies to switch to this model.
One of the factors driving the rise in RMB-denominated trade is cost. “In the past, Chinese suppliers have typically needed to add a buffer of between 1% and 3% on to their quotes to hedge against unfavourable exchange rate movement before a trade settles,” says McIntyre.
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| Peter McIntyre, head of UK trade, HSBC |
This buffer means that companies are in effect paying a premium for transacting in US dollar. By transacting in RMB, on the other hand, companies might find their Chinese counterparties are willing to negotiate lower prices.
Indeed, McIntyre says a survey of Chinese companies trading internationally carried out by HSBC found 41% were willing to consider discounts of up to 3% on renminbi-denominated settlement. And 9% were willing to give even larger discounts.
In addition, companies that are willing to transact with their Chinese trading partners in RMB might find they have access to a larger pool of potential counterparties, including smaller suppliers who might be unwilling to trade in US dollar.
As such, there is a strong incentive for companies outside of China to transact in RMB – but not all companies are prepared to make the move at this point.
Invoicing in US dollar is often viewed as the more convenient choice, particularly by companies in the US that eliminate FX risk by trading in their home currency. For companies in the UK and Europe, transacting in US dollar means they will still incur FX risk – but nevertheless, managing US dollar FX risk might be less daunting than the prospect of managing RMB risk.
However, for companies already trading with Chinese counterparties, and for those aiming to do so, the potential cost savings and the ability to build relationships with new buyers and suppliers are substantial considerations.
Companies that do not make the move might find their competitiveness is undermined by their rivals, who might be able to negotiate cost savings that can then be passed to their customers, as well as pursuing attractive new trading relationships with companies only willing to trade in RMB.