Trade finance: RMB expansion catches up with China GDP

By:
Kimberley Long
Published on:

Capital controls have constrained the use of the renminbi in global trade, while China’s real economy has surged ahead. Despite the strict rules around its use, market players are punting on strong RMB growth in 2015, Euromoney’s Trade Finance survey reveals

Since the Chinese government announced the establishment of 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. However, for a country that dominates international trade flows and with a forecast GDP of 6.3% of 2015 – compared with global forecasts of 3.5% – the currency has not yet reached anything close to its full potential.

"The currency is underutilised at an international level," says Astrid Thorsen, head of business intelligence at Swift. But its modest use is not down to a lack of interest from the global markets.

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Trade Finance Survey 2015 full results

The results on the question around RMB usage recorded in Euromoney's Trade Finance Survey presented some of the most conclusive figures in the poll.

The frequently predicted rise of RMB use looks certain to stay on track, as 38% of respondents stated their belief that 5% of their total trade will be denominated in renminbi in the next 12 to 24 months. The expectation that the use of the RMB will rise is marked. Even more emphatic is that 70% of respondents believe up to 25% of their trade will be conducted in RMB in the next two years. Crucially, this is a trend that goes far beyond China's near neighbours.

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Breaking down the results, the Asian market unsurprisingly returned the highest expected use of the renminbi, with 15% forecasting that between 80% and 100% of trade would soon be RMB denominated. However, looking 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.

Astrid-Thorsen
  What we have seen in data growth is mainly from institutional transfers, creating big increases in the usage of the currency without necessarily linking to the trade business

Astrid Thorsen, Swift

Even with tight restrictions imposed on its use, the renminbi has been moving forward at a steady pace. The latest figures from Swift’s RMB Tracker – based on the flows across its messaging service – show that 50 of the 161 countries that use the currency are now seeing 10% or more of their flows into China and Hong Kong being denominated in renminbi. These numbers chime almost perfectly with those of the survey.

As it edges its way up the table, the perception could be that this has been a meteoric increase in only a few years. But what has been experienced to date is still only the fabled tip of the iceberg. Back in November 2011, Swift ranked it as 17th in its table of world currencies, behind the New Zealand dollar and the South African rand. The currency has now risen to be the seventh most-used on its messaging services and based on value. Over the past 18 months this growth has been encouraged by countries including Malaysia and Australia increasing their RMB usage. In Europe, Germany’s usage rose by 151% and Sweden's by a staggering 1,050% since April 2013.

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%.

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. 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."

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.

Establishing offshore centres enables greater freedom of trade transactions, while 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.