04 November 2016

The Renminbi: quest for active adoption

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The internationalisation of the renminbi (RMB) has been a driving force in China's march towards economic liberalisation. Most analysts agree that RMB usage is gaining momentum, and are seeing that the use of the currency in global trade transactions is increasing.

HSBC's 2016 RMB Internationalisation survey found the RMB was the second-most used currency in trade finance globally. In 2010, just 3 per cent of mainland China's trade was settled in RMB. By 2020, this will top 50 per cent.

However, Australian businesses have been slow to adopt the unit as their trade currency of choice, and there is reluctance by corporates to use the Chinese currency due to the familiarity, comfort and accepted international practise of using the US dollar.

Most analysts agree that RMB usage in Australia is gaining momentum and it is just a matter of building up trust through trade and transactions that work before it gains widespread acceptance.

Trade between the two countries accounted for the largest single-country share of Australia's exports (28 per cent) and imports (17 per cent), according to the Australian Department of Foreign Affairs and Trade. Yet despite China being Australia's largest trading partner and two-way trade totalling USD150 billion in 2014/15, the take-up of the RMB by Australian businesses remains scant.

Simon Babbage, HSBC country head of global liquidity and cash management, said while the usage of RMB was quite widespread across HSBC's customers who dealt with China, the "volume and consistency of use of RMB has a way to go", adding that less than 10 per cent of HSBC's available trade transactions in Australia were conducted in RMB.

"In most instances, the Australian counterpart is comfortable with the notion of dealing in RMB. As the policies relax and as the Chinese government becomes more of an enabler around RMB, there'll be more usage," Mr Babbage said.

Vina Cheung, HSBC global head of RMB internationalisation, said there were signs of an upward trend of RMB payment activity in Australia. In July 2016, the RMB accounted for 2.02 per cent of all foreign currency payments in Australia, up from 1.92 per cent a year earlier.

In most instances, the Australian counterpart is comfortable with the notion of dealing in RMB. As the policies relax and as the Chinese government becomes more of an enabler around RMB, there'll be more usage,

Simon Babbage, Head of Global Liquidity and Cash Management, HSBC Bank Australia

Direct convertibility

Ms Cheung said corporates were becoming more aware of the benefits of trading in RMB such as securing cheaper pricing benefits from Chinese suppliers and reduced foreign exchange costs due to direct convertibility that exits between the two currencies.

Since direct convertibility between the RMB and Australian dollar came into effect in 2013, companies have been able to remove US dollar volatility. Until then, trading was done indirectly through the U.S. dollar, meaning companies had to first convert either of their currencies into US dollars. Despite this arrangement, enterprises are cautious as unknowns such as country risk and liquidity issues remain.

Ms Cheung said more education was required to encourage Chinese businesses to trade in RMB, but there were signs of increased use of RMB from China in offshore direct investment. She said Chinese companies in Australia should also start considering negotiating with their headquarters in China or other offshore affiliates to settle their intra-company transactions in RMB.

"So a key driver also should come from Chinese corporates as we have seen the Chinese government prioritise their considerations on corporate's needs when structuring their policies with one aim to allow RMB internationalisation as a business enabler," Ms Cheung said.

Dominic Meagher - an economist and a contributor to the recently published book, 'Renminbi Rising: A New Global Monetary System Emerges', which outlines China's moves to internationalise the RMB - said there were several advantages for companies dealing with China that settled trade in RMB. These included reduced currency risk, a marketing advantage to better satisfy Chinese demand, improved currency hedging, and better relations with customers and suppliers.

Uncertainty pulls the brakes

While the US dollar remains the dominant-traded currency, many China watchers expect the RMB to at least challenge the euro's role as the world's second-most important reserve currency within a decade, but some obstacles remain.

Dr Meagher said two conditions were needed to achieve full liberalisation of the RMB - sufficient demand for its international use and the creation by the Chinese government of the appropriate institutions to facilitate the use of the currency. "At the moment neither of those is fully there," Dr Meagher said.

"We are waiting for China to come up with the institutional structure that allows a freely convertible currency," he said.

Tim Harcourt, the JW Nevile Fellow in Economics at the University of New South Wales Business School, said while there were advantages for companies trading in RMB -- as it was convenient and reduced currency risk -- some businesses were reluctant to have too many assets in RMB as there remained uncertainty about potential rulings from the Chinese government.

"I can understand having some working cash in RMB for supply, but you wouldn't want too much exposure to it," Mr Harcourt said, adding that businesses did not want to be "exposed to a big decision by Chinese authorities that would adversely affect them."

Mr Harcourt said many Australian enterprises were in a holding pattern when it came to doing business in RMB. “They think it's something for the long-term that they will do, but they are almost hedging their bets now,” Mr Harcourt said.

"While the Chinese economy and exchange rate remain controlled and while the Chinese financial markets are pretty immature, business is holding off," Mr Harcourt said.

For many, the unpredictability of Chinese policymaking remains an issue. Episodes in 2015 when regulators interfered with the stock market and the RMB reinforced those concerns. As John Brooks, trade economist with The Australia-Pacific Institute, an advisory body focussing on international trade and finance elaborated, trade in RMB was yet to be adopted by most Australian companies because there was still a degree of uncertainty when dealing with a controlled currency.

"Even though the RMB facilities are available, Australian companies are very reticent in taking up the ability to trade in RMB," Mr Brooks said. "They are unsure of how it will work at the Chinese end and it is a natural resistance as many of us have been brought up in international trade by using US dollars as the currency of trade," Mr Brooks said.

Mr Brooks also added that businesses were likely to use RMB in the future as there was a financial benefit due to lower transactions costs as companies could deal directly in RMB and did not need to trade through a third currency, typically the US dollar.

RMB market share

The Chinese currency was included in the International Monetary Fund's Special Drawing Right (SDR) currency basket on October 1, 2016 which should increase its usage around the world. The move is also significant as the RMB is the first emerging market currency to be included in the SDR basket. Most analysts expect the RMB weighting to be increased over the next decade and to be joined by other emerging market currencies such as the Indian rupee.

SWIFT, which operates a secure messaging system used by banks to transfer money around the world, said the RMB had less than a 2 per cent share as a global payments currency. It said the RMB reached its peak of a 2.79 per cent share of global payments in August 2015, but since then its share has been decreasing, most likely due to volatility in the Chinese stock market and the slowing Chinese economy.

Ms Cheung said China was determined to proceed with its currency reforms which would ensure progress towards the internationalisation of the RMB.

"By 2020, we'll see at least 50 per cent of China's cross-border trade settled in RMB," Ms Cheung said. "In the process, we do need to manage the volatility or certain market events that will affect the stability of the currency," she said.

SWIFT tracker data from August 2016 showed the RMB had a share of 1.90 per cent as an international payments currency, ranking it fifth in the world. The Australian dollar was ranked eighth with a 1.59 per cent share while the US dollar was in pole position at 41.30 per cent.

In a separate July 2016 report, Internationalisation of the Renminbi: Measuring Progress Towards a Global Currency, SWIFT said it was optimistic about the RMB's internationalisation.

"Since 2011, the RMB has steadily progressed along its path to become a global currency in international trade. SWIFT's data indicates that many RMB data points continue to progress in areas such as payments, bank adoption and offshore clearing centre growth," the report said.

HSBC's 2016 RMB Internationalisation survey released in October reported that in 12 months, there had been an accelerated use of RMB for cross-border trade with 24 per cent of businesses globally using RMB up from 17 per cent in 2015.

The poll of 1600 decision makers across 14 countries found almost one-fifth (18 per cent) of Australian companies were now using the RMB to do business with China compared with 13 per cent a year earlier.

"More than 40 per cent of Australian companies believe the RMB will be an international trading currency in the next five years, versus 29 per cent in 2015," said Steve Hughes, head of Commercial Banking, HSBC Australia.

HSBC foreign exchange strategists said in a May 2016 report that China remained committed to further reforms and that "the RMB was in the midst of a lengthy transition from a highly managed FX regime to more of a floating one”.

"But it has long been our view that China's path towards greater exchange rate flexibility is not a straightforward one, but involves various `ease-then-squeeze' episodes," the HSBC report said.

More than 40 per cent of Australian companies believe the RMB will be an international trading currency in the next five years, versus 29 per cent in 2015,

Steve Hughes, Managing Director and Head of Commercial Banking, HSBC Bank Australia

"A slow burn"

For large corporations, the adoption of the RMB also remains low as most trade sectors have a global pricing system already in place, often in other currencies. One of the reasons behind the slow uptake among the resource sector to trade in RMB is because bulk commodities like iron ore are priced globally in US dollars.

While the usage of RMB is currently not vast compared with US dollars, it is gaining gradual acceptance among HSBC customers, with Mr Babbage describing the take-up as "a slow burn".

HSBC's customer base in Australia covers mining services and some mining, agriculture and food producers, retailers, the services sector and education.

Ms Cheung said it was a big hurdle for commodity companies to re-denominate their trade currency from US dollars to RMB.

"However, it does not mean they are not looking at it," she said, adding that globally some resource companies were exploring opportunities to settle in RMB to use that as a "business enabler to help them in down cycles".

Ms Cheung said businesses needed to change their behaviour to get the most out of trading in RMB.

"It's a matter of them understanding the benefit and prioritising their business strategy to enable RMB for certain transactions," she said. "Corporates need to actively manage the currency from a hedging and risk management perspective."

Ms Cheung said there were solutions that businesses could adopt when it came to managing RMB volatility, and there was also a need for them to start investigating the potential benefits that could be gained by settling in RMB.

"As a corporate, rather than adopting a wait and see attitude towards RMB, they should proactively talk to bankers to understand and quantify the potential benefits they could gain from re-denominating their transactions in RMB," Ms Cheung said.

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