Renminbi offers bright spot amid global trade finance slump

By:
Rebecca Brace
Published on:

The renminbi’s impressive rise this year as a global trade finance currency is a positive development for a critical market that has been buffeted hard in recent years by limp demand and financial regulation.

According to Swift, the renminbi’s evolution as a global currency continues apace and it is now only second to the dominant US dollar as a trade finance currency, having surpassed the euro for the first time.

Historically, trade between Chinese companies and overseas companies was largely US dollar denominated but since the introduction of China’s cross-border renminbi trade settlement scheme in 2009, a growing percentage of trade between leading Chinese companies and overseas counterparties has been conducted in the Chinese currency.

Having represented only 1.89% of activity in letters of credit and collections in January 2012, the renminbi now accounts for 8.66% of the global market, while the euro has moved down into third place at 7.87%. The US dollar remains dominant, accounting for 81.08% of trade finance.

This growth is impressive and particularly so, given that in the year-to-date total global trade finance volumes have plummeted to $97 billion from about $181 billion compared with a year ago, according to Dealogic.

Much of this drop-off is due to a prolonged slump in demand from importers and exporters the world over, but financing channels have also been constrained by stringent Basel III bank capital regulations.

While trade finance volumes are unlikely to recover until global economic growth picks up and there is greater clarity on how trade finance is treated under Basel III, the rise of the renminbi is at least a positive move, highlighting the future direction of the market.

One of the main factors contributing to the renminbi’s growth, says Wim Raymaekers, head of banking and treasury markets at Swift, includes the availability of liquidity in the currency. He cites the growing trend for Chinese banks to establish branches in European cities including Frankfurt and Luxembourg, where China’s three largest banks have their European headquarters.

“We’ve also seen increased availability among banks, including Chinese banks, in terms of their product offering,” he adds. “At a recent renminbi conference in London, you could see banks very actively promoting their capabilities and product offerings in areas such as trade finance, trade settlement and providing liquidity in renminbi FX.”

Raymaekers points out that an important factor driving the adoption of the renminbi is that banks have the capabilities to provide those transactional services to their customers in these countries.

Regulatory developments are also contributing to the adoption of renminbi in trade finance.

Michael Vrontamitis, at Standard Chartered
“Following People’s Bank of China’s circular 168 in July, a series of new measures, including – but not limited to – simplified cross-border renminbi trade settlement procedures and taking the cross-border inter-company lending scheme beyond its early pilot status, have been well received by corporates,” says Michael Vrontamitis, head of product for Asia, transaction banking at Standard Chartered.

“There is now less operational burden and a shorter turnaround for renminbi trade settlements.”

Despite the rapid growth of renminbi in trade finance, Raymaekers points out that trade finance is only used in around 20% of global trade transactions. Overall, renminbi is the 12th-largest payments currency, with an activity share of 0.84% in October 2013.

“Some of those payments are now being made in renminbi, to the extent that the renminbi has moved from number 20 to number 12,” says Raymaekers. “It is a good progression, but there is still quite a long way to go.”

Noel Quinn, group general manager and regional head of commercial banking for HSBC Asia Pacific, agrees there is more to come.

“In the next five years, we expect the renminbi to be fully convertible and have forecast that over half of China’s trade with emerging markets will be settled in renminbi in that time,” he says.

“However, the vast majority of businesses outside of Greater China still haven't taken full advantage of the renminbi for cross-border transactions.”

Raymaekers says Germany and France are two countries in which renminbi payments are becoming more widespread, as both countries are big trading partners of China.

On the other hand, adoption in the US has been limited, despite trade ties with China. Since the US dollar is the country’s domestic currency, there is less incentive for companies in the US to trade in renminbi.

Nevertheless, it is expected that the role of the Chinese currency in global trade will continue to grow at a global level.

“We expect China’s total trade to double in size between now and 2020,” says Vrontamitis. “We also think the share of trade invoiced in renminbi will double to some 28%.”