Defying Gravity; the Relentless Rise of the Renminbi

The evolution of the renminbi (RMB) since its debut outside of China little more than five years ago has been impressive. The currency has become one of the top 10 most traded currencies in the world, and has displaced the euro and the US dollar as the dominant reference currency in East Asia. Indeed, the aggregate value of trade settled in the Chinese currency actually quadrupled between 2010 and 2012.

Yet the RMB is still surprisingly infrequently used to settle cross-border payments with China. This can be partly attributed to the relative youth of the currency, but the currency risk and financing costs involved for foreign counterparties must also be taken into account.

Indeed, the percentage of China’s total payments transacted in RMB seems minute at a mere 12% when compared to Switzerland where nigh on 100% of total payments are transacted in the Swiss franc (CHF) according to the
CIA World Factbook
. But the RMB is performing admirably by other metrics. According to SWIFT,
the CHF accounted for 1.32% of total global payments in October 2014
while the RMB – despite having only five years of market presence – had moved ahead with 1.59% of total global payments transacted in the currency. Given that China is the largest exporter in the world it is clear how much potential there is for further RMB growth.

Indeed, the Chinese authorities have made a concerted effort towards tapping this potential and fuelling the usage of the RMB in international trade. The cross-border trade settlement scheme introduced in 2009 was pivotal, and the Chinese government has since taken further steps to extend the list of mainland designated enterprises settling trades in RMB.

Hubs and Diversification

Meanwhile, the focus for the recent
RMB internationalisation summit
, held in Singapore in September, was on the growth of offshore RMB trading hubs in Europe and on the push for full capital account convertibility – both of which would further propel RMB internationalisation. What’s more, the UK is the first overseas country to issue a sovereign bond denominated in RMB, and offshore trading hubs have popped up around the globe over recent years in locations such as Hong Kong, Singapore and Frankfurt.

One straightforward reason that the RMB is being increasingly adopted by international companies is that it offers an opportunity to diversify their currency portfolios. However, there are a number of other factors that have led China’s trade partners to consider the RMB as a settlement option. The first is a simple matter of leverage – given China’s importance to global trade Chinese corporates will continue to gain negotiating power and use it to persuade their trade partners to settle in RMB.

Secondly, despite the brief period of depreciation that the RMB saw early on in 2014, the majority of analysts expect the currency to appreciate in the long term, making it more attractive for non-Chinese companies to hold and use. With deeper RMB reserves offshore, its international liquidity will increase – further stimulating the currency’s usage as international corporations become more comfortable with accepting the RMB for trade settlement.

However, currency risk does presently constitute a considerable deterrent for corporates, which often demand price cuts in order to offset the risk involved. While reductions would be justifiable, Chinese corporates – unwilling to reveal how they price currency risk – are unlikely to approve them.

Better interest rates on the US dollar (USD) also mean that financing costs are actually lower when the trade is settled in USD. The fact that the proportion of international payments settled in USD is equivalent to more than 500% of the nation’s annual export value is a testament to both this and to the US dollar’s unparalleled dominion in international trade.

What’s more, the restrictions surrounding the international usage of RMB for trade settlement are still difficult to navigate. The Chinese government has not yet confirmed a date for full capital account convertibility, and RMB settlement remains a very bureaucratic process for Chinese corporates and their trade partners.

That being said, regulation is already becoming more relaxed and – although a timescale for full capital account convertibility is not yet defined – the Chinese government is steadily removing barriers on bilateral trade and capital flows. Indeed, the establishment of the Shanghai Pilot Free Trade Zone (PFTZ) and the similar initiatives this triggered in other regions mark a further step towards full account convertibility.

While it is unlikely that the RMB will rival the USD in international trade finance in the short term, its increasing presence is testament to its growing attractiveness for international corporates and is the promise of things to come.

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