Trade as the Driver for RMB Internationalisation
World trade is continuing to exhibit remarkable growth, although the trade flow landscape across countries and regions is expected to change as emerging economies hit their stride in the distribution of market share and western economies decline in comparative importance.
China is expected to be the world’s largest trading economy by 2015. By then, it will have overtaken the US. Already last year, China had placed itself in a comfortable first place position in respect of imports and exports of merchandise, with total trade flows amounting to US$3.87 trillion, as per reports released by China’s customs administration. Moreover, China is already the number one trading partner for over 120 countries worldwide.
This dramatic evolution of foreign trade has made the renminbi (RMB) an increasingly important international currency, sustained by a three-step strategy adopted by the Chinese authorities:
This strategy is already producing strong results, with an increase of 171% year-on-year (from January 2012 to January 2013) of the market share of RMB payments, propelling RMB to one of the most used of the world’s payment currencies. Imports and exports are the main drivers for the international use of a currency, and forecasts indicate an increase in the share of RMB-denominated flows in China’s overall trade from 9% in 2011 to 30-40% by 2015.
Letters of Credit
Even more remarkable is the evolution of Letters of Credit (LoC) denominated in RMB. According to recent SWIFT data, RMB is the world’s third biggest currency in global issuance of LoC by value with a market share of over 4%.
Most of the business is concentrated in the Asia Pacific region, with well over 50% of all LoC in transaction value being sent by banks in China to Hong Kong and nearly 20% going from China to Singapore. Meanwhile in Europe, and in the central and eastern (CEE) area of the continent, the use of RMB LoCs has not yet developed to its full potential. I do expect this to change, however, as RMB becomes a more and more important global currency.
Benefits of RMB Invoicing
Invoicing in RMB will provide traders and treasurers with access to a larger supplier base, and increase the prospects for doing business with Chinese companies, as more and more Chinese buyers and suppliers prefer to transact in RMB as they enter the global stage. Holding an RMB account also helps companies in their cash management activities and assists optimal hedging of their foreign exchange (FX) currency positions. Invoicing in RMB is very simple, as it basically requires a bank account in RMB and the ability to provide related trade documents. Moreover, with the implementation of proper hedging mechanisms for offshore China, adequate protection can be ensured.
The European Union (EU) is China’s biggest trade partner and also its biggest import source. China’s exports to the EU reached US$334bn in 2012, down 6.2% year-on-year, while its imports from the EU increased 0.4% year-on-year to US$212.05bn. China is also a major trade partner for all countries in Central and Eastern Europe (CEE), with a huge potential for trade finance instruments in RMB in the near future.
The increasing relevance of China trade will also encourage many European trade players dealing with China to add RMB to their preferred trade currencies and benefit from the numerous cost advantages for both importers and exporters. Some of the benefits include lower FX cost and reduced customs validations for incoming foreign currencies denominated transactions.
The cost benefits for overseas partners have been estimated at 3% to 5% and we expect this to fuel the growth of RMB LoCs in the future.
UniCredit Group has noted the increasing trend of trade between CEE and China, as well as of the advantages that RMB settlements may bring to CEE importer and exporter clients. The bank has responded by developing products and a framework to support corporate treasurers in RMB trade-related transactions, both on the import and export side. This includes import and export LoCs in RMB and forfeiting of deferred payments under letters of credit at an attractive RMB interest. The group’s branches in Hong Kong, Shanghai and Guangzhou recently developed direct payments for investments, dividends and financings, and offer exchange rates for RMB against all currencies, as well as RMB deposit accounts and general purpose loans for corporate clients.
Although internationalisation of RMB is still in its early days, on current trends it will become the third world currency in the very near future, joining the USD and euro (EUR) on the world stage. Corporate treasurers should prepare to face both the challenges and the opportunities of doing business in RMB.