What Should Your Company Do About the Renminbi?

If there’s anything you want to know about the renminbi’s emergence as an international currency, the man to ask is Wim Raymaekers (pictured), Head of Banking Market at the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The Brussels-based specialist can extract information from the messages that the world’s banks send to each other.

 
His on-the-ground readings are throwing up some surprising findings. Since October last year, Raymaekers has noticed a surge in the number and size of renminbi-denominated banking instructions related mostly to payments, and significant upward movement in trade finance, securities and foreign-exchange transactions.
 
“From October last year to June this year, we saw 33% month-on-month growth,” he told CFO Innovation. “That’s a ten-fold increase from October to June.” To be sure, the rise is from a low base, but it is enough to catapult the renminbi to 18th place in the ranking of the most used currencies in world payments. The RMB was in 35th place in October.
 
So far, more than 900 banks in 70 countries have started using the RMB amongst themselves, “an indication of the internationalization of China’s currency,” says Raymaekers. The renminbi is already significantly used in some countries, among them Thailand, Philippines, United Arab Emirates and Qatar. “Sixty percent to more than 90% of the value of payments [that go through the SWIFT system] in the last two countries is in renminbi,” says Raymaekers. 
 
Corporate Challenges
The trend poses significant implications for Asia’s CFOs and treasurers. If they pay for Chinese products in renminbi and in turn accept the RMB for their own products, their company will end up with a stash of China’s currency. That’s not necessarily a bad thing if the renminbi continues to strengthen against the dollar. So far this year, it is up 3.6% against the greenback.
 
But they also become exposed to a currency that is convertible on the trade account (the RMB as medium of exchange) but, unlike the dollar, euro and yen, not convertible on the capital account (the RMB as a store of wealth). This means that corporate treasuries need to go through complicated contortions to change excess renminbi into another currency and park it in short-term Treasury bills, for example, or to fund an M&A transaction.
 
Without difficult-to-get permission, companies cannot even bring back to China the renminbi they raised offshore – the proceeds of trade with Chinese counterparties, perhaps, or money from issuing so-called RMB-denominated dim-sum bonds in Hong Kong. “You can do it, but you are limited in terms of the sectors you can do and the amount you can do it in,” says Raymaekers.
 
But a quicker way may be emerging to optimize the value of excess RMB holdings in the form of foreign exchange trades not involving China (or Hong Kong, whose efforts to become an offshore RMB centre are backed by the Chinese). Raymaekers reports that 43% of all RMB foreign exchange trades today do not touch China or Hong Kong at all.
 
“That’s truly offshore FX,” says Raymaekers. The UK accounts for the largest portion of those FX trades, with the US a smaller player. If these volumes continue to grow, companies may be able to freely convert their excess renminbi into other currencies, up to a point, even though China moves at a glacial pace in liberalizing RMB convertibility on the capital account.
 
Buying and Selling
On trade, at least, companies should be encountering fewer problems. On a visit to Hong Kong last month, Vice Premier Li Keqiang, who is widely seen as China’s next premier, announced that companies across all of China can now settle trades in renminbi, not just in 20 provinces as previously.   
 
That may be a boon for foreigners exporting into China, since even small companies in a remote corner of the country can theoretically import from abroad using renminbi. Financial institutions in China and their FX and hedging products will see business diminish, but Chinese buying of foreign goods overall may get a boost.
 
Indeed, says Raymaekers, “most of the trade settlements are payments going out to pay for imports. But we’re also seeing now payments [in renminbi] coming into China to pay for Chinese goods and pay Chinese workers doing construction work on projects by Chinese companies in the Middle East.”
 
Surprisingly, SWIFT’s records show increasing usage of the renminbi in Italy, driven largely by vehicle sales into China. “I think it is to accommodate further imports of Italian cars,” says Raymaekers. A similar dynamic is at work in Thailand and the Philippines and the products they sell to China and those they buy from there.
 
Chinese buyers naturally prefer to pay in their own currency to do away with the hassle of buying foreign currencies and the associated exposure to FX risk. It has not yet come to the point where they are turning away non-renminbi business, but willingness to deal in renminbi rather than, say, US dollars, can give some companies an edge in China.
 
Overtaking the Ruble
All these raise questions about the future of the dollar as the world’s de facto currency and the renminbi’s ascent as its replacement.  
 
Raymaekers detects no appreciable increase in renminbi-denominated payments in the US, which “still holds the balance of power,” he explains. “If I’m a huge retailer, I can source from so many companies. If you don’t want my dollars, I go somewhere else. Or some German company, that can say, You don’t want my high technology? Where else would you buy it from?”
 
As well, the renminbi effect has yet to enter commodities. Trading in oil and other key raw materials is still done in US dollars. China does not export crude – it is in fact a net importer – and therefore cannot dictate what currency producers like Saudi Arabia prefer to use.
 
Indeed, the renminbi’s share of world payments is still less than 1%, compared with nearly 40% for the euro and more than 35% for the US dollar. From being the world’s 35th most utilized currency in payments, however, the renminbi has overtaken the zloty, Turkish lira and ruble to rise to the 18th spot in July.
 
SWIFT is also seeing some central banks dealing in RMB-denominated transactions. Malaysia and a few other small countries in Asia have unveiled plans to invest part of their foreign exchange reserves in RMB-denominated assets 
 
But Raymaekers is not sure whether the central bank instructions SWIFT is detecting are related to reserve holdings or, more likely, a response to demand by domestic companies that need renminbi to settle transactions with Chinese counterparties.
 
What Now for the Dollar?
So is the renminbi replacing the dollar? Like other analysts, Raymaekers thinks the process will take a long time, if at all. The RMB may join the euro, yen, sterling and Swiss franc as an alternative store of value, but like those other currencies, it is unlikely to dethrone the greenback from its lofty perch any time soon.
 
“There’s a long way to go,” says Raymaekers. “It’s fast to go from No. 18 to No. 17 to No. 16 [in world payments], but to go from five to four to three, those increments are huge.” The substitution that’s going on, where trade that is usually denominated in US dollars or euro is being replaced by the renminbi at the insistence of the Chinese counterparty, is still too small to really move the dial.
 
Still, given that China’s share of world trade stands at 11.4 %, the third largest after the EU and the US, the renminbi can potentially become the third largest most utilized currency in payments. It can also move up in the league tables of currencies in FX trading. The renminbi has not even cracked the top ten yet, even though its share of world GDP in 2010, at 9.5%, is the third largest after the US (23.3%) and EU (19.4%).  
 
“We will probably see [the internationalization of the renminbi] continue to grow, not just in number of payments but also in volume,” Raymaekers concludes. “What I think we will start to see is that the bigger countries will start to put volumes through.”
 
He is now looking at SWIFT data for July and August. If the past eight months are any indication, the on-the-ground numbers are likely to show a continued 33% month-on-month growth, or even better, in world usage of the renminbi.
 
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation.   
 
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