TFR LOOKS AT TRADING WITH CHINA

When the Chinese import and export growth slowed up, reflecting lower demand for Chinese exports overseas and slower domestic demand, one would be forgiven for assuming this would affect growth in renminbi(RMB) trade finance.

In fact, the reverse has happened. Cross-border trade settled in RMB rose 40% last year to CNY2.46trn (US$0.4trn). Cheng Jun, general manager of Bank of China’s corporate banking unit, observes that this is almost as much as the CNY2.58trn (US$0.5trn)of RMB trade in the 2.5 years between the launch of the RMB trade settlement scheme in July 2009 and the close of 2011.

This represents just over 2% of world trade (US$18trn in2012, according to World Trade Organization estimates), although some estimates are lower. Nevertheless, given that China is the second largest economy in the world, its currency will not be on the sidelines for much longer, says Simon Constantinides, HSBC’s regional head of global trade and receivables finance Asia-Pacific.

China overtook the US as the largest goods trading nation in 2012 – Chinese two-way trade hit US$3.87trn with the US atUS$3.82trn. 

A EuroFinance survey of 300 corporate treasurers in May2013 reports that 73% of respondents believe the RMB will be at least the world’s third most important currency within ten years and a further 27% reckon it will overtake the euro to second place behind the US dollar. Optimism was highest among those already using at least one offshore RMB product.¹

Business benefits

“Headwinds in international trade push corporates to think even harder about their competitiveness and operational efficiency. And transacting in the RMB creates opportunities for them to reduce FX costs,” says Standard Chartered’s head of RMB products Asia, Frankie Au.”

Kuresh Sarjan, head of global trade finance Asia Pacific at Bank of America Merrill Lynch (BofAML) agrees: “We have certainly seen our corporate clients more and more re-denominating and re-invoicing their transactions in the RMB.”He confirms his eyes have been glued to the opportunities ever since the currency’s trade pilot in 2009.²

This is because settling in RMB makes it less expensive for Chinese buyers and suppliers to deal with foreign corporates – which helps expand the corporate’s network and improve purchasing power. In a survey of 700 international businesses in China conducted by Neilson on behalf of HSBC, 53% of respondents said they would offer discounts of up to 5% for transactions settled in RMB. Pacific at Bank of America Merrill Lynch (BofAML) agrees: “We have certainly seen our corporate clients more and more re-denominating and re-invoicing their transactions in the RMB.”

He confirms his eyes have been glued to the opportunities ever since the currency’s trade pilot in 2009.²

Constantinides adds: “The 24% of respondents who expected to start using the RMB within the next five years gave these reasons why:

■to mitigate FX risk (59%);

■to obtain better pricing from their trading partners (42%); and

■to benefit from market disparities between on and off shore RMB markets.”

However, fewer businesses outside Hong Kong and mainland China appear to be taking advantage of the RMB as a means to gain competitive advantage, with 11% of respondents in Singapore,11% in the UK, 9% in German, 9% in the US and 7% in Australia confirming its use. The EuroFinance survey paints a similar picture, citing “concerns about regulation, readiness of internal systems and policies and a lack of understanding of how using offshore RMBcould benefit their business”.

How well corporates understand the opportunities available is the key determining factor, says StanChart’s Au: “Those that switch to the RMB have operations in China or a base in Asia where they have a number of business dealings with the Chinese regions or subsidiaries in China.” See Figure 1 for his explanatory summary.

Why the cold feet from the foreign corporates? Bank of China’s Cheng Jun explains: “Exporters to China that earn RMB will want to know whether RMB will be used widely in trade in the future; whether the cross-border allocation and use of RMB funds are convenient; and whether there are added-value benefits of using RMB to settle cross-border trade.” He continues: “Importers that pay in RMB need to know what it costs to pay in RMB and whether sufficient RMB funds are available.”

Corporates need to get up to speed fast. HSBC’s Constantinides warns: “It is clear that Chinese traders are prepared to share the benefit gained from removing the currency risk from within their cost base. Businesses trading with China that fail to seize the opportunity of using the RMB may be losing out to their competitors – it’s not a level playing field.”

While global trade banks active in Asia are taking a proactive approach to client education using seminars and discussions with relationship managers, Sibos is a good opportunity to review some of the SWIFT support available.

Its most recent white paper, Perspectives on the future of RMB clearing, makes the point that trade finance is the primary driver behind the increase in RMB-denominated payment transactions.

It adds: “While the potential cost savings of using the RMB can help corporations, the industry still needs to do further work to evaluate the exact direct savings, and if foreign corporations are truly benefiting from the savings related to RMB trade finance.

Cost advantages in addition to the relaxation of documentary requirements and administration procedures in China would further help the future growth of RMB for trade finance purposes.”

Not only does its monthly RMB Tracker continue to provide its thorough open access briefing on how RMB internationalisation affects trade finance, but it launched an in-depth project to measure the relative growth in the international use of the RMB in April 2012.³

Jonathan Batten, professor of finance at Monash University, will be sharing his findings in his session ‘RMB Internationalisation: Is there a tipping point?’ at Sibos on 19 September at 2pm.

Where the clients are

While the abolition of the floor on loan rates by the People’s Bank of China is generally reckoned to be a sign of the central bank’s commitment towards interest rate liberalisation and market orientated reform, the timeline for full liberalisation is for some, a “crystal ball prediction”. Other observers are more certain: HSBC says the RMB will be fully convertible by 2017.⁴

For trade finance providers, the trend all eyes are on is the expansion of RMB use outside China and what this means in terms of client service (see Figure 2).

Says B of AML’s Sarjan: “Adoption is increasing on a regular basis across our client base. The call on whether it will be fourth or fifth is less important than how much corporate and financial institution clients both adopt and work with RMB.”

Another important factor affecting developments of offshore RMB liquidity is Chinese FDI. Africa, for example, is building up reserves of RMB from the direct investments made in the continent, which can then be used to pay for Chinese imports. Bank of China’s Cheng Jun sees this “would create a smooth circulation while avoiding the exchange rate risk of using a third country’s currency”.

Clarissa 

References

1. EuroFinance ‘5-click survey: Offshore Renminbi’ available from Standard Chartered at http://tinyurl.com/lbgs3ur

2. A useful summary of the rationale and process of the RMB isavailable in Chatham House’s briefing, ‘Connecting the dots of China’s Renminbi Strategy’ at http://tinyurl.com/owuxw5d

3. The RMB reports can be found on www.swift.com at http://tinyurl.com/os2rwnw

4. HSBC research: ‘The rise of the redback II’ March 2013