The renminbi’s (RMB) continuing growth story again hit the headlines in 2016. One milestone was its acceptance by the International Monetary Fund (IMF) as a global ‘reserve currency’ – one that is widely used enough in international trade that central banks are prepared to hold it in their stocks of foreign exchange.
At the same time, offshore clearing hubs – banks authorised by China’s central bank, the People’s Bank of China (PBOC), to clear the currency beyond its borders – continued to spring up across the world. In addition the PBOC-backed Cross-Border Interbank Payment System (CIPS) – which aims to facilitate use of the RMB globally by cutting costs and process times – marked its first year in action, representing a significant step forward for connecting China’s financial infrastructure to global markets.
Such developments have come as RMB plays an ever-greater role in financing trade, and as China’s commercial ambitions continue to broaden worldwide. As a result, the volume of RMB-denominated trade and payments continues to increase.
As a recent study from Commerzbank finds, more and more companies are looking to tap into this growth. By invoicing in the currency, they can gain a range of considerable advantages: from being better positioned to enter Chinese markets and managing international cash more effectively, to maximising profits from investments and hedging against currency risks.
However, the transition to using RMB is far from simple, and will rely on banks that can offer the right foreign exchange (FX) products, insights on Chinese markets and familiarity with international trade.
2016: an important chapter in the RMB story
The growth of RMB in world financial markets continues at pace, with 2016 bringing several landmark developments with respect to the currency’s internationalisation. Among the most noteworthy events was the IMF’s inclusion of the currency in its ‘special drawing rights’ (SDR) basket. This means it joined the exclusive club of internationally recognised ‘reserve currencies’ used by central banks, previously comprising only the US dollar (USD), euro (EUR), British pound (GBP) and Japanese yen (JPY).
This marked a considerable political feat for China, but it will also act as a confidence-building measure; reassuring central banks worldwide of the value in holding RMB assets and recognising that the currency is now ‘freely useable’ in world trade.
Last year also saw the establishment of more global ‘RMB clearing hubs’ from London, Paris and Frankfurt to Toronto, Singapore and Doha, enabling international corporates to better access RMB accounts and products. These centres ultimately help improve companies’ RMB liquidity beyond Chinese borders.
Commerzbank has seen the highly-publicised establishment of these hubs raise awareness of Chinese business and RMB opportunities among local companies in Germany and Switzerland. The creation of yet more hubs, in New York and Dubai, is on the horizon.
Meanwhile, 2016 showed that the CIPS ran successfully, which will continue to aid RMB payment clearing and settlement between China and other countries. This centralised financial messaging infrastructure offers companies a valuable, China-based complement to the use of correspondent banking partners and clearing banks dotted around the world.
With Phase 1 of the CIPS now complete; that is the adoption of global financial messaging standards and automated processing of data for RMB-denominated transactions, Phase 2 will see the system expand over the coming year. This will bring more banks on board, allowing for financial messages to be communicated without the need to maintain a physical presence in China.
Impressive growth trends
These developments are set against a backdrop of steady global growth for RMB. The currency is certainly making its mark on the real economy: according to SWIFT’s statistics, the RMB is now the third-most used currency in trade finance after USD and EUR, with a share of 4.61% of the global market.
This figure will doubtless increase. For instance, China’s ‘one belt, one road’ (OBOR) initiative – the grand plan to spur trade through investment in road, rail and energy infrastructure – is gaining traction across Asia and Europe. RMB will be crucial to facilitating commerce sparked by the initiative, which covers some 64 countries, one third of the world’s gross domestic product (GDP), and two thirds of its population.
RMB has also surged in importance in the payments sphere. Back in 2012, SWIFT’s rankings of the most-used global payment currencies (by value) placed the RMB in 12th position; having flirted with fourth position in August 2015, RMB finished 2016 at a respectable fifth. This means it commanded a market share of 2.00% of the value of financial messages sent across the global network – with only USD (41.07%), EUR (31.55%), GBP (7.38%), and JPY (3.38%) able to boast higher shares.
More than 100 countries in all are now sending RMB-denominated payments directly to and from China and Hong Kong. Individual progress has also been considerable: in the United Arab Emirates (UAE), for instance, the value of RMB-denominated payments has grown by about 45% since 2015.
Companies are getting on board
Given such important developments and promising growth trends, it’s no surprise that awareness of RMB among companies has deepened considerably in just one year.
The results of Commerzbank’s 2016 Customer Survey conducted with market researcher the Forsa Institute of over 200 German firms illustrate this growing interest. The poll found that companies’ use of RMB in their cross-border transactions had almost doubled from 2014.
The survey also found that while 17% of respondents had made the transition to invoicing their Chinese partners in RMB, a further 15.5% were planning to convert their invoicing within 12 months of the poll – meaning that, in total, about a third of companies are actively dealing with the RMB issue. This compares to only 25% in 2015.
Why make the jump to RMB?
Corporate clients are clearly eager to open up new discussions about RMB, but what is behind such demand?
One reason is greater profitability. Companies able to invoice in RMB can find themselves in a better negotiating position for prices when settling trade with Chinese partners. Indeed, in the survey the ability to gain price benefits from invoicing in RMB emerged as the crucial factor for 56% of respondents.
An additional competitive advantage of using RMB – cited by 53% of those companies polled – is the ability to maintain good relations with Chinese partners citing an explicit wish to invoice in the currency. A further 41%, in fact, found better connections to Chinese markets a clear incentive, given that RMB capability offers an overseas company access to Chinese firms that may not have a foreign exchange export licence.
Finally, as 47% of respondents agreed, the chance to hedge exchange rates is another key argument in favour of adopting RMB. Companies expanding their global business, inevitably coming into contact with a wider range of currencies, can better mitigate foreign exchange risk; indeed, it means they can also take risk off the shoulders of their Chinese partners.
Support from banking partners is needed
The RMB transition is hardly straightforward, however. Companies still need support in hedging their RMB exposure with the right tools in both onshore and offshore markets. As the yuan internationalises and liberalises, its volatility will only increase. Banks can affirm that hedging of RMB exposure during European trading hours has notably grown over the last two years.
What is more, the process of adopting RMB can be a challenging and lengthy process, as it affects both treasury and procurement departments. This means companies need full, front-to-end support from their banks across the value chain, along with innovative RMB accounts and payment products from their banks.
Finally, tapping the Chinese market may have become more commonplace in recent years but navigating international trade corridors remains complex. This means that companies – whether European corporates looking to expand to Asia, or Asian firms intending to transact in Europe – need a banking partner that is familiar with the local financial landscape.
RMB has continued to make a considerable impression on financial markets in 2016. Supported by those banks able to deal with the transition to RMB, treasurers can ensure 2017 is another RMB-denominated success story.