North American small- to medium-sized enterprises (SMEs) of late have been accepting the renminbi as one of its trade settlement currencies due to cost-saving potential. In the past, companies in North America settled their invoices with their Chinese counterparts in US dollars. Now, as China gradually seeks to internationalize its currency, MNCs – both large and small – have another option: the renminbi.
US-based Western Union highlights that North American corporates have been more willing to adopt the renminbi as these firms can benefit from potential dollar cost-savings of at least 3%.
“The American business would be happy because they would be saving money and the Chinese business would be happy because they would be receiving funds in their own currency, which eliminates exchange-rate volatility,” says Alfred Nader, vice-president of corporate strategy and development at Western Union Business Solutions.
The financial services company also adds that while Chinese companies prefer to transact in renminbi, they never asked to receive payments in the currency due to perceived reluctance on the part of the buyer.
As a result, Western counterparts are encouraged to initiate the negotiation process.
“The Americans, Canadians and businesses around the world need to make that first step,” says Nader. “Firstly, in letting their Chinese counterparts know that they are now able to pay in the renminbi. Secondly, to renegotiate pricing if we transact in renminbi.
“Those are the most important things and until businesses around the world – especially American and Canadian businesses – start to ask that question of their Chinese counterparts, they are going to continue to pay in the US dollars for trade settlement.”
As previously reported by Asiamoney, 36% of Chinese companies that can settle their exports in renminbi prefer to be paid in the currency, but 42% of Chinese companies never ask, according to a Western Union report released in March.
While the larger North American corporations have been more proactive in adopting the renminbi, SMEs in North America have now been keen to take on the currency as well.
“Now it’s not only starting to be talked about with the large MNCs but it is also starting to trickle down to the SME world,” says Nader. “The smaller companies that have all been importing from China for the last several decades are now starting to have an idea that they’re able to pay their counterparts in something else other than the US dollar. That’s a big shift of thought here in the US.”
Although the acceptance of the Chinese currency has been generally well-received in the western world, the “main challenge of inertia” remains, notes Western Union.
Chief financial officers of MNCs who have been observing large dollar savings on their balance sheet post-renminbi-adoption have difficulties in passing the message down through their multifaceted corporate structures.
“The biggest difficulty is to trickle down the message to everyone in the organization, especially [to those] involved with the purchasing,” says Nader. “When you are talking to a company that has purchasing agents around the world, it’s hard to get that message across to so many countries and purchasing managers that it is now okay to purchase in the renminbi.”
This is somewhat easier for SMEs as their corporate structures are not that complex, says Western Union. The only minor obstacle is to get comfortable with speaking to their Chinese counterparts and negotiating price.
For example, according to the report in March, MNCs that pay Chinese businesses in US dollars instead of the Chinese currency cost them $2.4 billion in fees related to foreign exchange risk.
Liquidity concerns
Despite the limited pool of renminbi liquidity available in the North America, Western Union believes this will not be an issue in the near future.
“Right now, that’s not a problem just because the adoption rate hasn’t been so fast,” notes Nader. “If all of a sudden the adoption rate jumps from say 10% to 20%, then you can see some liquidity issues. But before that takes place, you are starting to see places like London becoming a hub, which should increase the liquidity.”
Western Union highlights that China should also move towards establishing an offshore renminbi hub in New York, as this will address the lack of liquidity in the North American region.
“Perhaps in the next three to five years, we will see New York really making a push to be a hub for the renminbi,” says Nader. “It’s in China’s best interest if they did, because they would have Hong Kong, London and the US, and we will have full global coverage of the renminbi, which would be great for all businesses internationally.”
According to Swift, international trade settlements in the Chinese currency amounted to Rmb580 billion ($91.5 billion) in the first quarter of this year. Most of that went through Hong Kong, while Europe accounted for around 10%.
Swift also notes “there are some renminbi flows with the US and a relatively good adoption by Canada”, which indicates the growing interest in the Chinese currency in the North American region.