Since 2009, China has been slowly liberalising or internationalising its currency, the renminbi (RMB), though the establishment of various offshore centres/hubs. The long term strategy is for the RMB to potentially move from a trade financing currency to an investment currency and eventually to a global reserve currency.
In November 2014, an agreement was reached between Canada and China, which designated the latter as the first offshore trading centre in the Americas for RMB. The agreement between Canada and China includes a swap-line between their central banks, the Bank of Canada (BoC) and the People’s Bank of China (PBOC); the designation of Industrial and Commercial Bank of China (Canada) as the first clearing bank in the Americas; and an investor quota that allows access to Chinese capital markets.
This agreement will bring many benefits to the city of Toronto, including continuing to raise the region’s stature as a global financial centre, facilitating increased investment and trade, and strengthening Canada’s broader economic relationship with China.
But how will this development practically impact North American businesses; in particular treasury and finance professionals? Representatives from Canada’s business community have been instrumental in driving the initiative forward and are committed to its success. Now that it is a reality, it is expected that opportunities for RMB investment transactions will start to become more readily available through Canadian banking institutions and foreign institutions operating in Canada. Products such as corporate RMB accounts, lines of credit and facilities to transact foreign exchange (FX) and make payments in RMB will become more accessible throughout the Canadian banking network.
Although payment and FX services in RMB are already offered by most Canadian financial institutions (FIs), very few Canadian companies are taking advantage of the benefits. A recent HSBC survey showed that of the 11 countries surveyed, Canadian companies were the least likely to use RMB. Just 5% said they had conducted transactions in the Chinese currency compared to 22% of companies worldwide and 17% of US companies.
Benefits to Canadian Corporates Transacting with China
There are a multitude of benefits for small and mid-sized enterprises (SMEs) trying to expand in China and for financial professionals investing directly in yuan (CNY). Since the Canadian dollar (CAD) is not directly convertible to RMB, most Canadian businesses doing business with Chinese counterparts have had to settle transactions through a third party currency – usually US dollars (USD).
Typically payments are settled in 90 days for both imports and exports because there is an additional administrative requirement from the central bank when payment terms in foreign currencies go beyond 90 days. By altering this process and settling in RMB instead of USD there is a potential for Canadian businesses to improve profitability.
Example: Canadian Manufacturer Paying Suppliers in China
Using an example of a Canadian manufacturer that imports materials from China, the benefits of transacting in RMB instead of USD are as follows:
- Elimination of a FX premium, since typically Chinese suppliers inflate the USD price to account for the currency exposure they are absorbing.
- Lower transaction costs and foreign exchange risk, since there will be a direct exchange rate between RMB and CAD. Fluctuations between CAD and USD will no longer impact the transaction.
- Settlement in RMB enables an extension of payment terms of up to 210 days. This means the Canadian importer could purchase goods and on-sell them to customers before repaying their Chinese supplier.
- Potential discounts from Chinese suppliers. Although there is no certainty of a discount, many suppliers are willing to offer such an incentive to transact in RMB. The HSBC survey showed that 55% of Chinese businesses were ready to offer discounts up to 5% to their trading partners for RMB denominated transactions.
Greater Choice in Investment Products
Since Canada is the first RMB centre to be established in the western hemisphere, it will open a wide-range of financial services to local businesses and to all firms operating in the western time zone that have commercial ties with China. Canadian banks are likely to further extend the RMB-denominated investment products they offer related to trade finance or for investment purposes, such as bonds. This will enable investment proceeds to be invested directly instead of incurring a currency conversion.
Canada already has demonstrated support for RMB-denominated products with a healthy issuance of bonds. The province of British Columbia issued its second RMB-denominated bond in late 2014, raising RMB3bn and trade financing agency Export Development Canada (EDC) issued its second dim sum bond, valued at RMB306m, in October 2014.
Furthermore, included in the agreement with China and Canada was a Renminbi Qualified Foreign Institutional Investor (RQFII) quota of RMB50bn. This will allow investors based in the Americas with the option to invest directly in mainland securities using offshore RMB, providing another type of opportunity for investors to diversify their investments in RMB.
While a Canada-based RMB trading hub is an achieve¬ment in itself, the success of the operation will greatly depend on the adoption of RMB in cross-border trade by Canadian businesses, and the quality of financial products offered by Canadian banks. Canadian business should take advantage of this tremendous opportunity.
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