by Lady Michelle Jennifer Santos
LONDON, 4 March 2015 (TSR) – Since the Chinese government established its pilot Shanghai free-trade zone (FTZ) in September 2013, the renminbi has gone from being a largely unusable currency to nudging its way into the top-10 most used around the world.
The renminbi has been moving forward at a steady pace. Its international usage continues to jump, even amid China’s slowing GDP and a weak global economic climate.
After nearly one year firmly positioned in seventh place, the renminbi (RMB) has entered the top five of world payment currencies since November 2014, overtaking both the Canadian dollar and the Australian dollar by value. Two years ago, in January 2013, the RMB was ranked 13th with a share of 0.63%. In December 2014, the RMB peaked at a 2.17% share of global payments by value and now trails the Japanese yen which has a share of 2.69%.
“It is a great testimony to the internationalisation of the RMB and confirms its transition from an “emerging” to a “business as usual” payment currency. The rise of various offshore RMB clearing centres around the world, including eight new agreements signed with the People’s Bank of China in 2014, was an important driver fuelling this growth,” he added.
Overall, global RMB payments increased in value by 20.3% in December 2014, while the growth for payments across all currencies was 14.9%. The RMB has been showing a consistent three-digit growth over the past two years with an increase in value of payments by +321%. Over the last year, RMB payments grew in value by 102% compared to an overall yearly growth for all currencies of 4.4%.
According to the Euromoney Research Group breakdown, the Asian market returned the highest expected use of the renminbi, with 15% forecasting that between 80% and 100% of trade would soon be RMB denominated. Across all regions, there was a consistent belief that the RMB will be used for financing increasing levels of trade in the next two years.
“China’s reach, whether to the established economies of north America or the emerging commodity-rich regions of Africa, is on a staggering level. The Asian markets might have been the earliest adopters of the currency, but it has not taken long for the rest of the world to realise the benefits of trading with China in its own currency”, the report said.
“The rising adoption of the renminbi is also reflected by the experiences of the banks. Standard Chartered’s Offshore renminbi corporate survey, published November 2014, found respondents expect their RMB-denominated portion of trade with China to rise by 11 percentage points over the NEXT two years. As a result, the bank now forecasts 35% of all China’s trade will be denominated in renminbi by 2020, up from a previously forecast 28%”, it explained.
China’s role as the world’s leading manufacturer has driven the RMB’s ascent. The World Trade Organization’s International trade statistics 2014 report notes China became the world’s biggest merchandise trader in 2013, with its imports and exports reaching $4,159 billion. There is still a huge volume of trade that could yet be denominated in RMB.
9 Global hubs for renminbi offshore trading
These centers will make it easier for investors to have greater freedom to facilitate financial transactions, while lowering the cost of doing business for importers and exporters, and allowing corporates to move their funds out of the country with greater ease. The rising use of renminbi is not only related to trade, but also through cross-border sweeping. The emergence of RMB hubs in Asia, Europe and the US has enabled greater freedom of movement of the currency.
Standard Chartered has increased the number of offshore centres included in its Renminbi Globalisation Index (RGI) – which is based on trade flows – from just Hong Kong being the sole centre in 2011, to now including Singapore, London, Taiwan and New York. Paris and Seoul became the newest centres on the list in August last year.
There are total of 9 offshore renminbi centers around the world: Sydney, Seoul, Paris, Luxembourg, London, Frankfurt, Singapore, Hongkong and Toronto.
Internal developments do not end with the new FTZs. The announcement of the pan-China liquidity management scheme by the People’s Bank of China in the final weeks of 2014 has opened another option to corporates, but only if they fit the criteria relating to their number of years in operation, the size of their onshore and offshore entities and filings with the PBoC. Because of rules on corporate eligibility, the pan-China scheme would be more relevant for the bigger players that have higher levels of turnover and are able to meet all the requirements, Euromoney reported.
Even after the establishment of the new FTZs and the pan-China scheme, growth is unlikely to be exponential. Corporates will still have to meet the rules imposed by the government to be eligible to participate. And even if they do fit all the criteria, they need to make the decision whether or not this will be a favourable STEP to take.
Use of the RMB there is the benefit of pricing transparency and the ability to manage the underlying FX risk.
“For some corporates that had not used RMB before there had been concerns recently around the availability of liquidity in the market, as OFFSHORE RMB liquidity has been sluggish. That said, given the breadth and depth of the offshore FX deliverable market, corporates should be able to manage their RMB needs and exposure effectively,” Frankie Au, head of RMB products of Standard Charter Bank, said.
Another factor standing in the way of increased usage stems from the lack of infrastructure that is compatible with the Chinese language. Some messaging systems do not support the use of Chinese characters, making it difficult for transactions to be carried out where the language primarily being used is Mandarin. The lack of standardization in these messages also poses problems.
Astrid Thorsen, head of business intelligence at Swift, explains that Swift has attempted to remedy this with the publication of offshore and cross-border best-practice guidelines to facilitate standardized processes in back-office systems. Still, the potentially costly need to update technology presents another hurdle, even for those companies that may otherwise meet the criteria.
“A lack of market knowledge is also holding the renminbi back from even greater adoption and greater education efforts are needed. “There is still the perception that it is a difficult currency to handle,” Thorsten says.
Vina Cheung, head of RMB internationalization at HSBC, says: “With China’s economic strength on a global platform, RMB is greatly underutilized. The re-balancing is becoming a far more important driver in the internationalization of the currency.”
“There are still a lot of companies that will need more time. RMB might not be the right solution today – we are selling options and not saying RMB is always the best one.” There are benefits to be had however, as Cheung notes: “When using RMB, companies can often negotiate better terms. Quotes will also be more transparent as there’s no need to factor in hedging and FX margins.”
Increasing knowledge of how the currency can be used is one of the next steps for ensuring the figures of increased RMB usage recorded in the survey are reached. “Market knowledge and insight is crucial for corporates looking to take advantage of the growth of the RMB,” Au says.
“As China accelerates its efforts in implementing reforms to further liberalize the currency, there is more that can be done to educate the market and create awareness on existing opportunities and benefits. Banks are now taking a more proactive role in providing updates to key regulatory reforms to help clients navigate the rapidly changing RMB landscape”, Au added.
“The currency is underutilised at an international level,” says Thorsen. But its modest use is not down to a lack of interest from the global markets.
Additional reporting by Kimberley Long.