Coming to the Americas

The latest data from SWIFT, the financial messaging network, shows that more than a thousand banks worldwide use the yuan for payments with China and Hong Kong.

The figures (from May) say something more about the global reach of China’s currency. Financial institutions from the Americas are starting to catch up with their peers in offering yuan services, showing the largest increase in percentage terms (31%, well above the global mean) on the same period two years ago, with 114 banks now claiming RMB capabilities.

Next week WiC will publish the latest edition of The A-Z of the RMB, our primer on China’s efforts to internationalise its currency.

This week, we look more specifically at the yuan’s progress in the United States, Canada and Latin America, after speaking to three HSBC executives tasked with introducing it to their customers.

Martin Maciak, head of RMB development for banking and capital financing in the Americas, leads the effort to introduce HSBC’s corporate clients to a broader range of yuan-denominated services. He says that it has tended to be larger corporations from the US that have been most active in adopting the yuan, particularly onshore in China. “Our bigger clients are looking for support in areas like cash pooling, intra-company lending and working capital solutions. But these are larger corporations with significant operations inside China and mandates from their headquarters to run their businesses relatively independently. For these clients it’s less of a case of transferring money cross-border. Whatever profits they make in China they are reinvesting, not sending back to the US.”

On American soil the yuan’s progress has been slower, it seems, with only a few banks offering deposit accounts.

“Technically, a handful of banks can do it. But the demand from our customers isn’t there yet,” Maciak explains. “We commissioned a survey asking mainly our commercial banking clients which foreign currency accounts they would like to be made available and the RMB did not feature in the top 10.”

About 10% of American firms interviewed in HSBC’s annual RMB study earlier this year said that they were already using the yuan, while a quarter of respondents said they were talking about it.

Maciak says that uptake has been slow but highlights that the evolution of RMB-denominated financial solutions means that usage is poised to grow, especially as new products come to life and the financial landscape adapts to customer needs.

One of the clearest opportunities is for mid-sized exporters selling into China, where invoicing in RMB can open up a wider range of potential customers.

But so far New York hasn’t experienced the same promotional buzz over the renminbi as some other financial hubs. Certainly awareness trails that in London, Frankfurt and Luxembourg, where lobby groups actively campaign to pick up more business in the Chinese currency.

Nonetheless, Maciak points out that the efforts from the banking sector to educate clients in North America about the yuan are well underway. “On our own roadshows we find that there is a mix of experience across our customer base. Some of the multinationals are already very knowledgeable, while other clients are at a more introductory stage,” he reports. “It depends on the nature of their business, as well as how they have engaged with China in the past.”

“Frankly, there’s no denying that some of the benefits of using the RMB haven’t resonated as strongly in North America as they have in markets more dependent on trade with the Chinese or in countries nearer to China geographically,” Maciak says. “But it’s also the case that American firms are looking at the Chinese market like never before, especially at its new consumers, so we know that greater awareness of China’s currency is going to become a much more important factor in the future.”

“Right now the RMB story needs to be communicated so clients understand all the considerations about transacting in RMB, and HSBC is making every effort to promote this new opportunity with our clients.”

The situation seems similar in Latin America where the yuan is starting its journey into countries like Argentina, Brazil and Chile, which have all signed currency swaps with Beijing.

Last year Argentina was one of very few countries to activate its swap, reportedly drawing down $2.7 billion-worth of yuan, following pressure on its foreign exchange reserves.

Yuan deposits are as rare at Latin American banks as they are in the US, although Chile is setting the pace for the region after a series of policy announcements during a visit by Li Keqiang, the Chinese premier, in May.

Chile has a history of early engagement with Beijing as the first Latin American nation to establish diplomatic ties in 1970 and also the first to do a free trade deal with China 10 years ago.

Now it has debuted the first yuan clearing bank of its kind in the region, secured Rmb50 billion in quota under the Renminbi Qualified Foreign Institutional Investor programme (RQFII), and signed a Rmb22 billion currency swap deal with the People’s Bank of China.

The concessions make up what Alex Perez, HSBC’s head of China origination in banking and capital financing for the Americas, refers to as the “three gifts” in Beijing’s RMB internationalisation toolkit.

In fact Chile looks well positioned to help the yuan’s seeding on Latin American soil. In investment terms it has the most developed pension fund sector on the continent, offering a professional base for potential RQFII outflows. Last year China was also Chile’s top trading partner, accounting for $18.4 billion in exports and $15 billion in imports. And importantly its commodity-focused economy (it provides about a third of China’s copper imports) means that Chile offers a more complementary fit than countries like Mexico, which are more likely to compete with Chinese exporters in other markets.

Nonetheless Perez advises that adoption of the yuan across Latin America as a whole is likely to be “selective”. Although there are signs of initial interest, most companies, particularly those outside of the commodities space, are yet to demonstrate the level of demand for RMB trade and investment products witnessed in other parts of the world.

In part that’s because the leading Latin American brands with activities inside China are still at an early-to-intermediate stage of development, with profits more likely to be reinvested in their Chinese operations rather than repatriated.

Perez highlights the activities of two of the more prominent multilatinas – Latin American multinationals with global footprints – that have established themselves in China. Mexico’s biggest bakery brand, Grupo Bimbo, has invested in a production plant and is developing local products and a distribution network, while Nemak, a Mexican producer of automotive components, is building factories closer to key customers in the auto supply chain.

Similar success stories exist outside of Mexico: for example, Brazil’s Marfrig/Keystone Foods, the multinational food processing company, which has been in China for almost 25 years.

These firms will be handling their RMB-related activity from their Chinese headquarters in mainland China or Hong Kong, and more of the multilatinas are likely to do something similar as they extend their reach into China, either bulking up their on-the-ground presence, or operating from regional treasury centres nearby in Asia.

“Foreign direct investment into China by Latin American firms has grown modestly and more companies are growing their operations to integrate the Chinese market into their global value chains,” Perez explains. “But it doesn’t necessarily follow that the top performers are accumulating deep pools of Chinese currency back in their home markets. So we can’t judge the yuan’s progress solely against metrics like the increase in deposits at the Latin American banks.”

The situation is similar with investments from asset managers and pension funds. As yet there is little evidence of investment outflows by these players directly into the Chinese capital markets (although Chile’s new RQFII quota does open up a new channel for outbound flows from Latin America). Yet that doesn’t mean that Latin American investors aren’t interested in Chinese equities or fixed income offerings. Instead, they have been choosing to get into the market indirectly. “They might buy Greater China-related exchange traded funds primarily registered in London or New York, purchase A-shares through Stock Connect in Hong Kong or even give mandates to asset managers with pre-existing RQFII quota at other RMB hubs,” Perez explains.

Vying with Chile for lead position in the Americas in welcoming the RMB is Canada, where policymakers have been vocal in identifying trade with the Chinese as an important factor in improving local living standards in the decades ahead.

Jason Henderson, executive vice president and head of global banking and markets at HSBC Bank Canada, reports that Canadians already buy more goods and services from China than from any country other than the US.

But Canada is much further down the rankings – 21st, in fact – in terms of its exports to China. Hence the government’s focus on getting Canada’s businesses more RMB-ready: the hope is that greater familiarity with the Chinese currency will lead to a surge in exports of goods and services.

“It’s the moment in time when Canada gets to decide to strengthen our relationship with this growing economy that’s re-establishing itself as an economic powerhouse,” Michael de Jong, finance minister of British Columbia, told an audience celebrating the country’s new status as an offshore centre for the yuan in June.

In his keynote speech De Jong also highlighted Canada’s chance to get ahead of its regional rivals in the RMB race, citing “a limited time competitive advantage that won’t last forever, but a unique opportunity if we choose to take advantage”.

The opportunity extends to the financial services sector too. “This is real game-changer,” HSBC’s Henderson believes. “Previously, Canadian asset managers have focused on Chinese investments through channels in cities like Hong Kong. What’s new is that we can now access them directly from within Canada because we’ve been designated with RQFII quota. HSBC has already assisted two of the largest Canadian investors with investment quota and we’re targeting all of the top asset managers to get them similar access.”

Surprisingly, Canadian companies have been behind the curve in settling cross-border commerce with yuan. HSBC’s global survey on RMB readiness this year indicated that they were the second least likely to use the yuan for settlement purposes. Only 3% said that they had done so, which was some way below the international average. But almost two-thirds then said they expected to do more business with China in future, which was above the global mean.

“A lot of the Canadian companies expressed the desire to do more business with China, although many seem to have fallen behind in their understanding of the currency,” Henderson acknowledges. “But that’s actually a good story for us at HSBC as we can help them to grasp the opportunity better.”

The fact that a significant percentage of Canada’s population is Chinese-born or of Chinese origin, especially in British Columbia, could provide another boost for the RMB’s prospects.

“Clearly, government policy has been important in supporting the internationalisation effort,” Henderson says. “But Canada’s claims have also been helped by our longstanding experience of immigration and at least 35 years of the Asian diaspora.”

For the immediate future Canada wants to capitalise on its opportunity to get ahead with the Chinese currency. For HSBC’s client teams, that means answering the kind of questions about the yuan commonly heard in a number of other markets. “They want to know that they can open the appropriate bank accounts and that payment processes will be similar to those they are accustomed to; that they can get access to short term investments for their excess yuan balances; and that their letters of credit can be denominated in yuan,” Henderson explains.

“Our task is to make our customers aware that all these services already exist and that the tools they have been using for commercial activity with well-established markets like the US are now available for China – and all in the RMB too.”

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