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CHINA's growth has created a mismatch between its economic power and the
use of its currency, says Andrew Dell, CEO for HSBC Africa.
"China is the world’s largest exporter, second largest economy and most popular destination for direct investment - yet until four years ago, the renminbi had virtually no exposure in the international markets.
"Strict controls prohibited almost all export of the currency and its use in cross-border transactions. The offshore market, as we know it today, did not exist.
"Payments between Chinese companies and their foreign partners were usually conducted in US dollars or euros.”
But in 2009 Beijing set in motion a series of reforms to change this situation, aimed at expanding the use of
renminbi in cross-border trade settlement and to improve investment flows.
From a low base, the currency is rapidly becoming well established, explains Dell:
• Over 150 countries now do renminbi business in a typical month.
• 20 countries have signed renminbi swap or settlement agreements with China.
• We’ve seen the formation of a thriving offshore renminbi market.
• Commercially driven business is replacing transactions driven by market disparities.
• Demand for renminbi retail accounts is growing across the world.
• And the use of renminbi for cross-border transactions is growing rapidly. SWIFT data suggests that renminbi payments grew in value by 171% between January 2012 and January 2013.
Dell notes that the renminbi is increasingly part of normal day-to-day business for anyone trading with or investing in China.
“Already well under way, the process of internationalisation falls into three clear stages – it is developing first as a global trade currency, then concurrently as a global investment currency and finally, in the longer term, as a global reserve currency.”
Stage one: trade currency
There has been significant development in stage one – developing the renminbi into a global currency.
Dell points out that although China’s share of global trade is increasingly dominant, less than 1% of global trade is settled in the Chinese currency, which highlights its huge potential for growth.
Trade has been the chief driver of renminbi internationalisation, and usage is growing fast. Although a large proportion of this trade was between Hong Kong and China, it reflects a change in importer and exporter behaviour – switching from invoicing in US dollars to renminbi.
• In 2010, 2.6% of import and export goods trade in China was transacted in renminbi.
• In 2011, it rose to 6.4%.
• And in 2012, it accounted for around 8.2%.
Says Dell: “Today, all Chinese importers and exporters are permitted to settle trade in renminbi. Invoicing renminbi for trade is now practically unrestricted – importers and exporters trading with China can accept payment in renminbi anywhere in the world.”
Stage two: investment currency
For much of the twentieth century, it was trade in goods and services that dominated the world economy. Now it is financial flows that account for the lion’s share.
It is in this arena that China wants to get more involved in, and this outlines stage two of the renminbi’s internationalisation – becoming a global investment currency.
Dell says: “As the renminbi is not yet fully convertible, as an intermediate step, the Chinese government has promoted an offshore market – dominated by Hong Kong.”
He says that this offshore market has exceeded expectations:
• Since the first offshore bond was launched in 2007, market issuance has grown from 10 billion renminbi to 276 billion renminbi in 2012.
• In 2013, HSBC expects that issuance will reach around 350 billion renminbi.
• In the last 12 months, we’ve seen the launch of new offshore investment products, such as renminbi A-share exchange-traded funds, renminbi deliverable futures and renminbi warrants.
• Major companies, such as Volkswagen, Tesco and America Movil for example, now use the offshore market to raise capital in renminbi.
But Dell notes that this is not just an offshore story, and that renminbi investment channels on the mainland have also been opening up.
Although talk of the offshore market and the mainland securities market might be interesting for financial folk on the trading floor, why is the renminbi becoming an investment currency matter for companies?
Dell says: “Well, these financial flows are just one side of becoming an investment currency. The other side is the mainland opening up to capital flows, by which I mean allowing businesses to invest, to buy other businesses and to build or buy factories and other facilities.
"In 2011, 12% of FDI into China was transacted using renminbi. In 2012, it was 35% - a huge increase. And now, developments in cash management mean that China can increasingly be managed like any other market – allowing funds to be deployed efficiently and conveniently.
"In this way, the trade and investment phases of internationalisation support and reinforce one another."
Stage three: reserve currency
Stage three of the renminbi’s internationalisation is becoming a reserve currency, which will come in time as a consequence of its openness as a trade and investment currency.
Says Dell: “Some central banks have already started accumulating renminbi reserves in the form of cash and bonds – including Russia, Saudi Arabia, Thailand and Venezuela.
"In 2012, the Bank of Japan announced its intention to add 65 billion RMB of Chinese government bonds to its holdings. Similarly, Central Bank of Nigeria announced it would convert up to 10% of its foreign currency reserve into renminbi.”
Nevertheless, the renminbi’s reserve status is a long-term prospect. In the medium term, full convertibility is the next essential step towards becoming a truly global currency.
So what are the opportunities surrounding the renminbi?
Dell notes that with regards to the renminbi, there are three main areas that present huge opportunities for businesses – these include:
• Eliminate FX costs and risks: This benefit accrues to the Chinese party, which could be a subsidiary of an international firm, and the benefit can be shared through negotiating better pricing or terms.
An HSBC survey found half of Chinese corporates were willing to offer discounts in return for using renminbi, with 41% of those surveyed willing to offer discounts of up to 3%, while 10% said they would offer even greater discounts.
• Take advantage of the onshore and offshore markets: This can help companies lower their funding costs or do their FX transactions at the best rate possible, while also centralising their currency transactions in a regional treasury centre.
• Build strong relationships with Chinese partners: By adopting the renminbi, you provide convenience for the Chinese counterparty – and by doing so early, you potentially create a competitive advantage which could be vital in winning market share.
“The opening up of China’s currency means – to some degree – the opening up of China’s economy. And in recent years, those businesses and economies that have raised their China exposure have outperformed.
"Adopting the renminbi can help increase your exposure in the years to come – and allow you to seize those opportunities on offer," says Dell.
* Andrew Dell is chief executive officer for HSBC Africa. Views expressed are his own.
"China is the world’s largest exporter, second largest economy and most popular destination for direct investment - yet until four years ago, the renminbi had virtually no exposure in the international markets.
"Strict controls prohibited almost all export of the currency and its use in cross-border transactions. The offshore market, as we know it today, did not exist.
"Payments between Chinese companies and their foreign partners were usually conducted in US dollars or euros.”
But in 2009 Beijing set in motion a series of reforms to change this situation, aimed at expanding the use of
renminbi in cross-border trade settlement and to improve investment flows.
From a low base, the currency is rapidly becoming well established, explains Dell:
• Over 150 countries now do renminbi business in a typical month.
• 20 countries have signed renminbi swap or settlement agreements with China.
• We’ve seen the formation of a thriving offshore renminbi market.
• Commercially driven business is replacing transactions driven by market disparities.
• Demand for renminbi retail accounts is growing across the world.
• And the use of renminbi for cross-border transactions is growing rapidly. SWIFT data suggests that renminbi payments grew in value by 171% between January 2012 and January 2013.
Dell notes that the renminbi is increasingly part of normal day-to-day business for anyone trading with or investing in China.
“Already well under way, the process of internationalisation falls into three clear stages – it is developing first as a global trade currency, then concurrently as a global investment currency and finally, in the longer term, as a global reserve currency.”
Stage one: trade currency
There has been significant development in stage one – developing the renminbi into a global currency.
Dell points out that although China’s share of global trade is increasingly dominant, less than 1% of global trade is settled in the Chinese currency, which highlights its huge potential for growth.
Trade has been the chief driver of renminbi internationalisation, and usage is growing fast. Although a large proportion of this trade was between Hong Kong and China, it reflects a change in importer and exporter behaviour – switching from invoicing in US dollars to renminbi.
• In 2010, 2.6% of import and export goods trade in China was transacted in renminbi.
• In 2011, it rose to 6.4%.
• And in 2012, it accounted for around 8.2%.
Says Dell: “Today, all Chinese importers and exporters are permitted to settle trade in renminbi. Invoicing renminbi for trade is now practically unrestricted – importers and exporters trading with China can accept payment in renminbi anywhere in the world.”
Stage two: investment currency
For much of the twentieth century, it was trade in goods and services that dominated the world economy. Now it is financial flows that account for the lion’s share.
It is in this arena that China wants to get more involved in, and this outlines stage two of the renminbi’s internationalisation – becoming a global investment currency.
Dell says: “As the renminbi is not yet fully convertible, as an intermediate step, the Chinese government has promoted an offshore market – dominated by Hong Kong.”
He says that this offshore market has exceeded expectations:
• Since the first offshore bond was launched in 2007, market issuance has grown from 10 billion renminbi to 276 billion renminbi in 2012.
• In 2013, HSBC expects that issuance will reach around 350 billion renminbi.
• In the last 12 months, we’ve seen the launch of new offshore investment products, such as renminbi A-share exchange-traded funds, renminbi deliverable futures and renminbi warrants.
• Major companies, such as Volkswagen, Tesco and America Movil for example, now use the offshore market to raise capital in renminbi.
But Dell notes that this is not just an offshore story, and that renminbi investment channels on the mainland have also been opening up.
Although talk of the offshore market and the mainland securities market might be interesting for financial folk on the trading floor, why is the renminbi becoming an investment currency matter for companies?
Dell says: “Well, these financial flows are just one side of becoming an investment currency. The other side is the mainland opening up to capital flows, by which I mean allowing businesses to invest, to buy other businesses and to build or buy factories and other facilities.
"In 2011, 12% of FDI into China was transacted using renminbi. In 2012, it was 35% - a huge increase. And now, developments in cash management mean that China can increasingly be managed like any other market – allowing funds to be deployed efficiently and conveniently.
"In this way, the trade and investment phases of internationalisation support and reinforce one another."
Stage three: reserve currency
Stage three of the renminbi’s internationalisation is becoming a reserve currency, which will come in time as a consequence of its openness as a trade and investment currency.
Says Dell: “Some central banks have already started accumulating renminbi reserves in the form of cash and bonds – including Russia, Saudi Arabia, Thailand and Venezuela.
"In 2012, the Bank of Japan announced its intention to add 65 billion RMB of Chinese government bonds to its holdings. Similarly, Central Bank of Nigeria announced it would convert up to 10% of its foreign currency reserve into renminbi.”
Nevertheless, the renminbi’s reserve status is a long-term prospect. In the medium term, full convertibility is the next essential step towards becoming a truly global currency.
So what are the opportunities surrounding the renminbi?
Dell notes that with regards to the renminbi, there are three main areas that present huge opportunities for businesses – these include:
• Eliminate FX costs and risks: This benefit accrues to the Chinese party, which could be a subsidiary of an international firm, and the benefit can be shared through negotiating better pricing or terms.
An HSBC survey found half of Chinese corporates were willing to offer discounts in return for using renminbi, with 41% of those surveyed willing to offer discounts of up to 3%, while 10% said they would offer even greater discounts.
• Take advantage of the onshore and offshore markets: This can help companies lower their funding costs or do their FX transactions at the best rate possible, while also centralising their currency transactions in a regional treasury centre.
• Build strong relationships with Chinese partners: By adopting the renminbi, you provide convenience for the Chinese counterparty – and by doing so early, you potentially create a competitive advantage which could be vital in winning market share.
“The opening up of China’s currency means – to some degree – the opening up of China’s economy. And in recent years, those businesses and economies that have raised their China exposure have outperformed.
"Adopting the renminbi can help increase your exposure in the years to come – and allow you to seize those opportunities on offer," says Dell.
* Andrew Dell is chief executive officer for HSBC Africa. Views expressed are his own.
