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Foreign Exchange

RMB – not a treasurer’s top choice for trade settlement

China has made a conscious effort to gradually loosen its control of the renminbi during the past few years. And while many global banks are constantly urging their corporate clients to add the renminbi to their list of trade-settlement currencies, they are still reluctant to do so, according to Asiamoney, a sister publication to EuromoneyFXNews.

Of late, financial institutions have been flexing their technological muscles by expanding into various treasury-related solutions to boost the global adoption of the Chinese currency. For example, Royal Bank of Scotland, Standard Chartered and Deutsche Bank are just a handful of the many banks that seek to leverage on offering renminbi-related banking solutions. The availability of these transaction banking-related solutions – and the various permutations of them – is expected to improve the efficiency and transparency of multinational corporations’ (MNCs) cash positions and transactions around the globe. While most of these platforms now come with renminbi capabilities, it still does not guarantee the adoption of the Chinese currency.

For starters, the non-fully convertible nature and lack of renminbi-denominated investment products is off-putting. At the moment, companies with growing offshore renminbi pools only have one financial centre to turn to – Hong Kong – which is still considered the main offshore hub despite the recent noise coming from London.

And if these corporates were to hold excess cash in renminbi, the choice of investment products and services – which includes being able to provide CNH quotes against G10 countries’ and other Asian currencies – is limited. This, again, deters treasurers from adopting the currency.

As a result, the Chinese currency remains under-utilized when compared to its trade levels. China accounts for 9.6% of the world’s trade but payments for goods in renminbi amounts for less than 1%, according to Society for Worldwide Interbank Financial Telecommunication (Swift).

Dual currency system adds to confusion

Also, the fact that offshore and onshore markets have different spot rates and disparate yield curves triggers confusion for many treasurers who are keen to adopt the currency. Now with the emergence of London as the next potential offshore hub and the possibility of a new currency known as the CNL, this could add to the confusion and create more exchange-rate discrepancies.

Problems exist at all levels of trade settlement. Currency swap agreements, which are meant to aid renminbi-denominated trade between China and other countries, have helped, but minimally.

Beijing has established nearly 20 bilateral swap lines during the past four years, but Australia ranks as the biggest economy yet to sign the deal and only the second western economy after New Zealand. The deal which amounts to Rmb200 billion ($30 billion) with the People’s Bank of China (PBoC) is the second largest after the Rmb400 billion swap line with Hong Kong.

Even though this is expected to support renminbi-denominated trade and investment between the two, a bulk of Australia’s commodity-driven trade is still priced in US dollars. Unless commodities are priced in renminbi, we will not see the Chinese currency having a big impact on trade finance.

As reported by Swift in March, Australia has the lowest volume of renminbi payments transacted in February, reaching a mere 1.9%, which is a drop from 3.1% in January 2012.

Lastly, the Hong Kong Monetary Authority (HKMA) recently streamlined renminbi netting procedures for specific MNCs to spur the usage of the Chinese currency in cross-border trade settlements. Part of the agreement enables corporates to overcome the extra documentation hurdle that was needed prior to April 2.

However, the newly specified guidelines still pose difficulties to companies that are keen on doing business with China. For example, eligible companies under the new regime must have been listed for not less than three years in Hong Kong, China, Taiwan, London, New York, Singapore and other jurisdictions that are members of the Financial Action Task Force. The corporate or its subsidiary must also have a business relationship with the authorized institution (AI) group – including the AI’s headquarters, branches or subsidiaries whether in or outside Hong Kong – for not less than three years.

Instead of simplifying procedures, the HKMA has created another obstacle.

The next development phase that China should embark on would be a further loosening of foreign investors’ participation, which should include overseas corporates, in the domestic capital markets. The China Securities Regulatory Commission raised quotas for the Qualified Foreign Institutional Investors programme from $30 billion to $80 billion in April, which is a positive start.

The closer integration of the mainland with the international financial community should also be pursued, via thought leadership exchanges to increase automation and make transacting in renminbi more competitive against the straight-through-processing of other currencies. As with all other new developments, MNCs also need to be educated about the benefits and the potential savings they could reap when using the Chinese currency in trade settlement.

Moreover, a new payment system that corporates are looking forward to utilizing is the China International Payment System (CIPS), which was announced by the PBoC last month. The new system will assist in developing the renminbi business across different time zones, improve trading security and build a robust environment for all market participants, says the central bank in a press release.

Although there is no further detail about the CIPS initiative, all Asiamoney knows is that it is expected to be fully operational in a year or two. Only then could we witness the potential rise in renminbi-denominated trade settlements.

While we are seeing the gradual take-up of renminbi outside China and as global banks remain optimistic, it will take years to develop substantial volumes. So until China takes bolder steps to open its capital account – allowing freer currency flows across its border – the goal of renminbi internationalization will not be met.

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