New Opportunities with the Renminbi

Last spring, the Singapore branch of the Industrial and Commercial Bank of China (ICBC) launched its
renminbi (RMB) clearing service in the city state
, making Singapore the third offshore RMB clearing centre and making it easier to use the Chinese currency for trade as well as financing in Southeast Asia.

As Standard Chartered Bank Singapore chief executive officer (CEO) Ray Ferguson told China Briefing, RMB clearing will enable more opportunities because “Singapore already leads as a regional treasury centre, is a springboard to Southeast Asia along the key trade corridor with China, and provides a hub for Asian wealth management and commodities trading.” 

In June the Hong Kong Monetary Authority (HKMA) announced the
launch of the long-awaited offshore renminbi (CNH) Hong Kong Interbank Offered Rate (HIBOR)
and announced that “the CNH HIBOR fixing will be a significant piece of financial infrastructure for the offshore RMB market”.

The launch supports growth of the RMB market by providing a benchmark for loan facilities, which can facilitate the development of more RMB interest rate products and increase the ability of market participants to manage the interest rate risk of their RMB business.

Last month, the People’s Bank of China (PBOC) surprised some observers by announcing the removal of restrictions on interest rates for lending, which means that banks in mainland China can now lend at whatever rate they like and compete for new borrowers with cheaper credit.

As Barclays economists Jian Chang and Joey Chew wrote in a note to clients, according to Reuters: “We see today’s announcement as a signal of the PBOC and the new leaders’ commitment towards interest rate liberalisation and more market-oriented reform.” Other observers weren’t quite as sanguine and saw the timing of the reform soon after the PBOC cracked down on lending in the shadow banking sector as less about banks issuing new loans and more about keeping old loans from going into default. Nonetheless, the change is significant. 

Climbing the Ranks

Amid all these changes, usage of the RMB for trade has continued to increase rapidly. In June, SWIFT reported that the currency had gained two places in the ranking of world payments currencies and moved a step closer to the top 10. It is now ranked 11th as a payments currency and hit an all-time high market share of 0.87%, overtaking both the Thai baht (THB) and the Norwegian krone (NOK). SWIFT said the RMB is currently at the same level in value that the Hong Kong dollar (HKD) was at in February 2013.

Moreover,
a recent HSBC survey
showed that half of all international companies in Hong Kong and almost a third in mainland China now use the RMB to conduct cross-border business. The survey also found that 53% of Chinese businesses surveyed would offer discounts of up to 5% for transactions settled in RMB. Even though fewer businesses outside Hong Kong and China are using the RMB for trade, with just 11% of businesses surveyed in Singapore and 7% in Australia doing so for example, businesses that do shift to the currency have an opportunity to reduce costs significantly.

While innovations such as the Singapore clearing centre and HIBOR were long-planned, interest rate deregulation had not been expected to happen until much later. With growth of China’s economy slowing, policymakers could well make other changes sooner than expected too. Regardless of when they happen, corporates that take advantage of the RMB to make their payments have opportunities to gain significant cost advantages by using the currency more for trade settlement.

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