By Evan Goldstein, Global Head of Renminbi Solutions, Deutsche Bank
The rapid progress of China’s currency, the Renminbi (RMB), cannot be denied. Indeed, since internationalisation began in 2009, the currency has altered the face of global markets, although the pace of change is likely to accelerate. Rising sharply in the world trade currency rankings – climbing from the 35th to the eighth most traded currency between October 2010 and August 2013[i] – the RMB has left important, well-known currencies such as the Hong Kong dollar and the Singapore dollar in its wake. What’s more, 2013 also saw the RMB overtake the euro to become the second most used currency in global trade finance (behind the US dollar).
Certainly, the RMB is making its mark on the global stage. Its potential as an international currency that could one day rival that of even the US dollar is being accepted by an increasingly wider audience. Singapore, Germany and Australia are the top three markets for RMB trade settlement outside China and Hong Kong (as at October 2013), evidencing its growing reach. European interest is particularly strong, and London and Frankfurt have recently been designated the first RMB clearing centres outside Asia.[ii]
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And as China continues to strengthen its ties with emerging markets (for example, two-way trade flows between Latin America and China soared from US$13 billion to in excess of US$120 billion between 2000 and 2009 – a staggering 660 per cent increase[iv]), the RMB’s role as a trade settlement currency is likely to explode.
Understanding the benefits
The currency’s continued advance is due to China introducing steps to increase the RMB’s accessibility via a series of policy changes. Documentary requirements, for example, have been significantly eased for corporates with proven track records, and with RMB trade transactions now able to take place electronically, the RMB has become more aligned with current corporate demands for efficiency, speed and ease-of-use.
The growing ease of transacting in RMB is certainly improving the currency’s appeal. Yet many companies, understandably, are continuing to show reluctance towards moving away from the habitual use of US dollar or euro denominated trade settlement. Furthermore, many report a lack of understanding of the RMB or awareness of its potential benefits. But these issues should not deter corporates from exploring the RMB’s potential.
Willingness to transact in RMB offers corporates an array of new opportunities in the Chinese market. Not only can corporates extend their client bases and trade with Chinese businesses that were previously inaccessible (due to their inability to transact in a foreign currency), this shift can allow corporates to negotiate improved sales terms. Indeed, Chinese companies are increasingly interested in conducting business in RMB to mitigate currency risk. Corporates that agree to settle in RMB can, therefore, receive cost reductions of perhaps two to three per cent – some even as high as seven per cent – as businesses in China pass-on the savings they’ve made through avoiding costs associated with FX and hedging on to their counterparty.
Challenges to navigate
Despite the clear advantages of RMB trade settlement, however, corporates must also be alert to the possible risks and complexities involved. For example, a serious consideration for corporates is the FX complications that can arise due to there still being two RMB currencies with different exchange rates: the pegged onshore RMB (CNY), and the floating offshore RMB (CNH). This means that funds still need to be divided into two pools, making it essential that operating systems are able to differentiate between CNY and CNH in order to navigate pricing, interest rates and derivative disparities. Moreover, CNY is the only official ISO code for RMB, and doesn’t allow for differentiation or payments between offshore and onshore pools.
A further complication is keeping abreast of the RMB’s many fluctuations. With the roll out of the People’s Bank of China’s (PBOC’s) RMB strategy ongoing, the capabilities allowed within the currency’s constraints are continually changing. These developments must therefore be monitored closely in order for corporates to remain alert to the intricacies of up-to-date regulatory and legal requirements.
Leveraging Renminbi opportunities
As the RMB’s prominence increases, corporates cannot afford to ignore its potential. Indeed, the currency’s progress thus far is widely believed to be just a scratch on the surface, with the eventual impact transforming global markets as transactions in RMB become commonplace. With the RMB’s progression inevitable, it is important that corporates embrace the currency and begin to fully leverage on the ever-increasing opportunities it presents. The question is, how?
While there is no “one-size-fits-all” solution for RMB adoption, specialist banking partners can work closely with clients, providing knowledge and guidance as they embark on their individual RMB strategy. The first step for all corporates in this respect should involve establishing an implementation timeline that clearly outlines expectations. It is important that the strategy has the backing of major stakeholders and counterparties, who should also be provided with comprehensive information on the processes involved throughout the RMB migration.
The RMB’s complexities mean having access to the support and experience of a specialist banking partner throughout the migration process could prove particularly beneficial. Certainly, those able to offer a holistic suite of cash, trade and FX products and services across the RMB spectrum can provide corporates with one-stop access to invaluable practical advice and assistance. And with the RMB in a state of flux in terms of capabilities and regulatory requirements, having such a banking partner – such as Deutsche Bank – that not only maintains a position at the forefront of RMB developments, but communicates these developments effectively and promptly with clients, is key to successfully transacting in this evolving currency.
Indeed, with the right technical support to address operational challenges – such as payables and receivables management – and through expert communication and consultative help to tackle evolving rules and regulations, the migration process for corporates can be seamless.
Switching to RMB, of course, requires adjustments – particularly to treasury and accounting infrastructures. And the entire migration process needs to be carefully managed. Yet, while the switch might create initial challenges, it is clear that corporates that are RMB-ready will be optimally positioned to capitalise on both current and upcoming opportunities, as the currency continues on its journey towards true internationalisation.
This article is based on a 2014 Deutsche Bank whitepaper, “The Renminbi: 2014 and beyond: Translating developments into tangible business opportunities”, essential reading for corporates considering the switch.
[i] Footnote 1: http://www.swift.com/assets/swift_com/documents/products_services/SWIFT_RMB_Tracker_November2011.pdf
[ii] Footnote 2: http://online.wsj.com/news/articles/SB10001424052702304418404579462971751348440
[iii] Footnote 3: http://www.forbes.com/sites/yunitaong/2014/07/09/more-u-s-companies-are-settling-trade-with-yuan/
[iv] Footnote 4: http://www.ibtimes.com/latin-america-increases-relations-china-what-does-mean-us-1317981