Rise of the RMB

Gimme five

Latest HSBC survey hints at a lucrative benefit if exporters use renminbi

Constantinides w

The renminbi was top of the agenda at HSBC’s fifth Global Connections event in Guangzhou at the end of June. The conference, attended by more than 70 of the bank’s corporate clients from around the world, brought together a selection of high-growth businesses in the southern Chinese city. It also offered a sneak preview of the bank’s latest RMB Survey, which was released officially last week. In it, more than 700 companies conducting international business with China were asked about their renminbi usage. Fewer than one in 10 firms thought that they had a “very good” understanding of how to use the Chinese currency, 40% reported quite a good understanding, while another 40% felt that their understanding was poor.

Perhaps more companies will improve their awareness of the renminbi after noting one of the survey’s key findings: that 53% of the Chinese companies contacted were ready to offer price discounts of up to 5% for renminbi-denominated transactions.

WiC caught up with Simon Constantinides, HSBC’s regional head of global trade and receivables finance for Asia-Pacific (pictured right), for his view on the renminbi’s internationalisation story.

Is the renminbi still making progress as a trade settlement currency?

It is continuing to grow, helped by factors like more currency swap lines being put into place. The Bank of England signed one recently, of course. It’s not just the central banks being active: the London Metal Exchange has just signed a memorandum of understanding with the Chinese to start settling metal trades in renminbi too, which I think will be significant because China is such a major commodity importer.

But hasn’t there been a bit of a slowdown in the growth of Chinese trade denominated in renminbi?

It has slowed but that’s because the pick-up was so rapid in the period immediately after the Chinese authorities first allowed cross-border settlement of trade in renminbi. Despite this we are still seeing growth in percentage terms but it’s also important to focus on the absolute amount of China’s two-way trade that is denominated in renminbi, because trade flows keep growing.

Another factor worth mentioning is that HSBC thinks imports will start to overtake exports in quantum as domestic consumption grows in China. This is going to drive uptake of the renminbi in paying for trade. If you are an importer into China, you are likely to be selling goods to your customers priced in the Chinese currency. If you buy the goods in the same currency, you take out the foreign exchange risk. This is going to be another major factor in increasing the share of the renminbi in cross-border trade.

How about outside China: what are you seeing with your clients?

There is certainly more awareness of the renminbi as a trade currency. For instance, three years ago we ran an event in Macau with a number of Indian clients to talk about how the Chinese currency was going to become a major factor in global trade. Most of them told us it would never happen in India and that there was no way they would settle business in renminbi. But many of these same clients are starting to do so. More recently we began a similar exercise in Bangladesh and we have just seen our first major trade transaction with a client there. And we are seeing other new trends, like a German client with operations in China that repatriated its dividends back to headquarters in renminbi.

Of course, there’s a long way to go as less than 1% of global payments are denominated in renminbi at the moment. But China has accelerated this process much faster than most people thought it would. For trade settlement, it started out with a scheme open only to a few hundred enterprises in a few cities. Now it’s a much fuller universe of companies – and the authorities only maintain a list of the firms who aren’t allowed to use the renminbi for trade. They’ve flipped the situation on its head.

How about traction in places like the US and Europe, which are more used to trading in their own currencies?

It is slower-going in these markets than in the Greater China region or among some of China’s more immediate trading partners in geographical terms. But HSBC is spending a lot of time educating North American and European clients that have regular trade flows with China. Often, this isn’t just about how to settle trade, as there’s also the investment angle. Clients are asking “If I take receipt of payment in renminbi, what can I do with it?”

Why does using the renminbi make sense in trade terms?

For international buyers there is a real opportunity to make savings. The surveys that we have conducted suggest that exporters from China are prepared to give a discount as high as 5% if the buyer is prepared to pay in the Chinese currency.

Take a typical company in China striking a deal with an international buyer in which it expects to be paid in six months. If it prices the deal in US dollars, it has got to think about where the dollar is going to be against the renminbi in six months time. Usually that means that the vendor will factor in some kind of premium to cover the exchange rate risk. I call this the “hedge factor” and Chinese companies are very good at building in additional margin on this basis.

But if the firm invoices in renminbi it takes this currency risk out of the equation. Sophisticated buyers, especially those with a good sense of the costs that go into producing the goods they are purchasing, have a new opportunity to push for lower prices with the vendor. It gives them more grounds for negotiation.

Of course, not every exporter will be interested in invoicing in renminbi. Some will want to keep deals dollar-based because it gives them a little more margin and because they are confident that they can manage the currency risk. But some vendors will be keener on doing business if the offer is made to pay them in renminbi. As I said, it opens up new opportunities to negotiate.

What reasons do you hear from companies who haven’t settled trade using the renminbi yet?

One response is that their accounting systems can’t handle renminbi payments. Another is that they are delaying because it would mean changing their hedging policies. Others tell us “we just deal in dollars, we want to keep it simple”, especially smaller firms or those with thin margins, who say they can’t take the risk of currency volatility, which might wipe out their profits.

It’s not just the finance people who are cautious. A company that wants to switch might also have to convince its sourcing teams. Many of these guys will only have experience of negotiating contracts paid in dollars and they will argue that their comparative base is priced in dollars too.

Admittedly, the whole idea of using the renminbi is still very new to most people outside China. For instance, if you are an Indonesian firm trading with a Chinese partner, you will probably have a history of transacting exclusively with dollars. If that is going to change there are various questions to resolve like: “Does my supplier know how to invoice me in renminbi?”; “What do I need to do to get Chinese currency to make a payment into China?”; and “If I take payment in renminbi, how do I manage my exposure?”

So it’s more likely that larger companies will be first to settle trade with renminbi?

Yes, probably. Larger firms often have more opportunity to try it out as a trade settlement currency. It is a harder for SMEs to find the time and resources to go through the same process, although the task isn’t as tough as some people think.

But the general mood is changing. Two years ago, it was a case of HSBC going to its clients to talk about China’s currency. Now more clients are approaching us to ask about it or coming back after an earlier conversation and saying, “We’re ready to try it”.

HSBC is playing its part too. We run lots of road shows and client events presenting the benefits of transacting in the renminbi. Once a client shows an interest, we go into more of the detail about how they actually do it. Sometimes these conversations can take weeks or months: I met one client recently who told me that it had taken a year of dialogue before it completed its first trade with the renminbi.

But fortunately, HSBC is ‘RMB-enabled’ in 58 markets and we have currency specialists in all our relationship management teams ready to talk to companies who are interested. The opportunity is there to be taken.

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