Start planning now for RMB internationalisation

By:
Published on:

The internationalisation of the renminbi (RMB) may be at an early stage, but the Chinese currency’s role in global trade is set to expand. Sherie Morais says companies need to start thinking now about how they can prepare for and benefit from doing business in RMB.

By Sherie Morais, head of transaction services origination for Middle East and Africa
Within the next 10 to 20 years, the RMB is going to become prominent on the international stage.Companies trading with China who rely on today's major currencies should look at RMB-denominated trade. That shift will have consequences that companies need to identify now if they are to successfully embrace this change.

A viable, well-structured RMB strategy will help them in a number of important areas, such as unlocking and redeploying working capital to maximise returns, reducing external financing needs, understanding and managing operational and credit risk and improving the visibility of their company's cash positions.

This is because global trade with China is only going to go in one direction - upwards. The Chinese economy is projected to grow by about 8 per cent annually over the next four years, according to data from the Economist Intelligence Unit. That's not as healthy as in recent years, but it is still much stronger than the economies of the US, the EU and Japan, where growth is expected to be about 2 per cent or less.

The RMB is not a world currency yet, and the full implications of its internationalisation are not clear, but the march has started.

Trade in the offshore renminbi (CNH), which may be a precursor to making the RMB fully convertible, has grown dramatically. In Hong Kong, where almost all CNH trade takes place, CNH -denominated deposits now total some CNH 500 billion (about USD78 billion), compared with virtually zero four years ago.

Use of the RMB is spreading. A property company made China's first RMB-denominated equity initial public offering in Hong Kong last year. The first RMB-denominated bond issued outside China was listed on the London Stock Exchange in early 2012, and the City of London has been in talks with China over making London a western hub for RMB trading. Meanwhile, trade in the onshore RMB, also known as CN Y, is slowly being liberalised.

Bringing the RMB into corporate trade and investment plans is essential if companies are to maximise their potential for developing new business in Asia. Companies that take active steps to do so, stand to benefit from potentially huge advantages of the internationalisation of the RMB.

Many Chinese firms will want to settle crossborder transactions in RMB in order to reduce their costs and currency risks in the future. Foreign firms ready to do business on that basis will be in a good position to negotiate favourable terms with their partners in China, as well as potentially mitigating their own currency risk. For buyers from China, goods can be priced and settled in RMB without any mark-up from foreign exchange.

Companies will also benefit from the flexibility of adding an extra currency to their portfolio - a currency that could prove to be as strong as, or stronger than, the existing major trading currencies. While the US dollar and the euro have both shown weakness during the financial crisis, the RMB has remained relatively stable.

The growth of the RMB as an international currency will be accompanied by the expansion of RMB-denominated instruments, including hedging tools, that will enable companies to better manage their RMB liquidity. Holding an RMB cash position is a natural hedge for trade flows with China.

All this means firms need to address their RMB strategies as soon as possible. That is particularly true for companies that trade heavily with China – such as those in the retail and commodity industries – as well as firms keen to diversify their investment portfolio and enjoy the potential appreciation of the RMB.

Businesses should consider a number of key questions:

  • Do your opportunities in China mean you will have a long-term commitment there?
  • Does China account for a significant share of your business, and is that likely to increase?
  • If you bid for a large order from a Chinese state-owned enterprise, will it make you more competitive if you can settle in RMB?
  • If you pay Chinese firms supplying such a contract – who may be suffering due to dollar depreciation – in RMB, will it make those suppliers more loyal to you, or help you to access more suppliers?
  • Can the RMB be exchanged and used as a hedging tool locally?

There is still time to develop an RMB strategy, but it is an element of planning that needs to be placed firmly on the corporate radar now. The sooner companies start planning, the sooner they will reap the benefits as the RMB evolves internationally in coming years.
 
For more RBS Insight content, click here


Disclaimer

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.

Where the document is connected to Over The Counter ("OTC") financial instruments you should be aware that OTC derivatives ("OTC Derivatives") can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as marketmakers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AF S Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the US Securities Act of 1933. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA /SIPC member and subsidiary of The Royal Bank of Scotland Group plc.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH 2 2YB.