Trade finance: RMB expansion catches up with China GDP
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.
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.
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.
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.
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
Vina Cheung, HSBC
The ability to move funds within institutions is helping the currency to meet its cross-border growth predictions. Swift’s growth figures relate to transactions between institutions and those within individual corporates going across borders. Thorsen says: “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.”
This indicates the rise in usage of cross-border sweeping facilities for companies with cash within China. The country was named as the least-efficient country for trapped cash repatriation in the Euromoney trapped cash pulse survey last year, so any developments to mitigate this issue will be welcomed by the corporate community.
Frankie Au, head of RMB products, transaction banking, at Standard Chartered, says: “The implementation of cross-border cash-pool sweeping has created additional flexibility in liquidity management as corporates can utilise trapped or surplus cash in China to meet working capital needs for their business and operations in other countries, and vice versa to leverage offshore funding to support their working-capital needs in China.”
The rising demand for renminbi for transactions will be fuelled this year by the creation of further free-trade zones across China. Following on from the pilot Shanghai FTZ, three additional locations in Guangdong, Tianjin and Fujian are to be established. In its RGI report, Standard Chartered suggests that its strategic existing economic ties with Hong Kong will particularly benefit Guangdong in becoming a secondary centre.
Internal developments do not end with the new FTZs. The announcement of the pan-China liquidity management scheme by the People's Bank of China in the final weeks of 2014 has opened another option to corporates, but only if they fit the criteria relating to their number of years in operation, the size of their onshore and offshore entities and filings with the PBoC. Because of rules on corporate eligibility, the pan-China scheme would be more relevant for the bigger players that have higher levels of turnover and are able to meet all the requirements.
"In November 2014, China introduced the pan-China cross-border scheme that allows companies across China to participate in cross-border RMB two-way cash-pool sweeping, even if they are not in the Shanghai FTZ," Au explains. "Corporates will need to meet specific requirements to be eligible for this scheme: the cash-pool participant companies need to have at least three years of operations and there is also a minimum amount of sales turnover required for their onshore and offshore pool participants. In the pan-China cross-border cash-pool scheme, there is also a net inflow quota to restrict the amount of liquidity that can be flowed into China and to keep overall control."
Even after the establishment of the new FTZs and the pan-China scheme, growth is unlikely to be exponential. Corporates will still have to meet the rules imposed by the government to be eligible to participate. And even if they do fit all the criteria, they need to make the decision whether or not this will be a favourable step to take.
Banks are now taking a more proactive role in providing updates to key regulatory reforms to help clients navigate the rapidly changing RMB landscape
Frankie Au, Standard Chartered
The opening up of the currency will continue to be a slow process, as each individual corporate will have to weigh up the options before deciding if adoption will be a beneficial move. Thorsen says: “Adding a new currency from a corporate perspective does not happen overnight.
“What we saw two or three years ago were that many financial institutions and corporates were observing the developments rather than taking any steps forward. The following two years were when others realised it was not just hype and that something was going on.”
For a corporate to decide to use the currency, it must come with clear financial benefits. Joao Galvao, head of financial supply chain, Americas, Deutsche Bank, says: "Ultimately it is a cost-benefit analysis, particularly for the corporates that will need to see the added benefits to using the RMB before they choose to adopt it."
Cheung adds: “It is important for companies to understand the benefits of RMB. When they are dealing with China, it can take time for some corporates to truly understand why it will benefit them from both a financial and a relationship building standpoint."
“There are still a lot of companies that will need more time. RMB might not be the right solution today – we are selling options and not saying RMB is always the best one.”
There are benefits to be had however, as Cheung notes: "When using RMB, companies can often negotiate better terms. Quotes will also be more transparent as there's no need to factor in hedging and FX margins."
Au agrees, saying that with the use of the RMB there is the benefit of pricing transparency and the ability to manage the underlying FX risk.
He adds: "For some corporates that had not used RMB before there had been concerns recently around the availability of liquidity in the market, as offshore RMB liquidity has been sluggish. That said, given the breadth and depth of the offshore FX deliverable market, corporates should be able to manage their RMB needs and exposure effectively."
Another factor standing in the way of increased usage stems from the lack of infrastructure that is compatible with the Chinese language. Some messaging systems do not support the use of Chinese characters, making it difficult for transactions to be carried out where the language primarily being used is Mandarin. The lack of standardization in these messages also poses problems. Thorsten explains that Swift has attempted to remedy this with the publication of offshore and cross-border best-practice guidelines to facilitate standardized processes in back-office systems. Still, the potentially costly need to update technology presents another hurdle, even for those companies that may otherwise meet the criteria.
Thorsen says a lack of market knowledge is also holding the renminbi back from even greater adoption and greater education efforts are needed. "There is still the perception that it is a difficult currency to handle."
Increasing knowledge of how the currency can be used is one of the next steps for ensuring the figures of increased RMB usage recorded in the survey are reached.
"Market knowledge and insight is crucial for corporates looking to take advantage of the growth of the RMB," Au says. "As China accelerates its efforts in implementing reforms to further liberalize the currency, there is more that can be done to educate the market and create awareness on existing opportunities and benefits. Banks are now taking a more proactive role in providing updates to key regulatory reforms to help clients navigate the rapidly changing RMB landscape."
The currency has come a long way in a limited space of time, and against the backdrop of poor global economic conditions. Swift's RMB tracker for November 2011 forecast that at its then growth rate the currency would fall short of its forecast top-three world currency placement by 2015.
Looking forward three years to its November 2014 report Swift placed it in 7th position, giving it some way to go to reach the elusive top three, but still a decent position, placing the renminbi alongside fully-convertible currencies. From a low base then, the renminbi’s international usage continues to jump, even amid China’s slowing GDP and a weak global economic climate.