As the renminbi charts its course to becoming a fully convertible currency, the first stage of the journey is in using the renminbi to pay for trade transactions. ‘Exponential’ is often used to describe the rate of growth in the use of the renmimbi in trade payments. However, in recent months the trade settlement statistics have dampened some of the optimism on how quickly the renminbi will become internationalised.
The process of opening up renminbi for trade has been done in stages by the Chinese authorities and now, if the transaction has genuine trade underlying it, there are few restrictions on using the Chinese currency for companies outside China. Payments began in July 2009 when cross-border renminbi settlement was introduced to five pilot cities in China that were allowed to settle with companies in Hong Kong, Macao and members of the Association of South-east Asian Nations. In June 2010, that pilot was expanded to 20 provinces in China and some international companies, as long as the banks involved were licensed under the cross-border settlement scheme. In August 2011, the Chinese central bank extended the scheme to include all areas in China.
Impressive growth
Figures from the People’s Bank of China at the end of June 2011 show as the restrictions were lifted, the growth in the use of renminbi has indeed been exponential. In the first half of 2011, renminbi settlement of cross-border trade reached Rmb957.57bn ($149.9bn), a growth of 13.3 times compared with the same period in 2010.
Observers, such as Pierre Veyres, head of global transaction banking at BNP Paribas, note that the internationalisation of the renminbi has been an important trend since 2009 and the growth in trade settlement was exponential up until July 2011. “But there has been a pause in the trade settlement volumes,” says Mr Veyres.
Figures released by the payment network Swift show that renminbi trade settlement volumes declined in September and October 2011. Whether this decline is a blip that can be explained away or is part of a more long-term slowdown in the adoption of the renminbi has been keenly debated, especially as the figures are seen as an indicator of how quickly the renminbi will become an international currency. The Swift figures also show that the majority of payments are still made through Hong Kong.
In September and October 2011, 81% of all renminbi payments were processed by financial institutions in Hong Kong, showing that despite the exponential growth in the initial months of the trade settlement scheme, there is a long way to go before the currency is widely used across the world. Despite this, however, there was a significant increase in renminbi usage with Taiwan, Russia, Indonesia and the Philippines.
Gradual appreciation
Ian Tandy, head of trade for HSBC's trade and supply chain, UK, notes that the renminbi has not been adopted in the UK as quickly as some people had hoped. “But it is only going one way,” he says of the currency’s direction in becoming internationalised. Rather than experiencing a 'big bang' moment, Mr Tandy describes the pace of adoption as a “creep”.
The Swift figures that were released in November 2011 show that the UK is still steadily increasing in its use of renminbi payments and reached nearly 9% of total volumes. This compares with Singapore, where the total volumes have slowly declined to nearly 7% of the total transactions that were settled in renminbi.
While the majority of the transactions are still being processed in Hong Kong, it is not possible to break this figure down into whether the payments are being made by international companies through a Hong Kong bank, or by subsidiaries of Chinese companies in Hong Kong, for example. Anecdotally, however, there are general patterns to the early adopters of those who are using renminbi for trade payments.
Ben Chan, HSBC’s deputy head of business planning and strategy in Hong Kong, says it has been Hong Kong companies with subsidiaries in China, and Chinese companies with Hong Kong subsidiaries, that have been the first to adopt renminbi payments. Next are multinational corporations with Chinese subsidiaries, followed by companies in Hong Kong that have a trading relationship with a company in China. The last wave of adopters is other international companies that have trading relationships with China.
Cutting out the middleman
More currency goes through Hong Kong than physical trade, notes another HSBC executive. He argues that eventually the middle men in Hong Kong will be taken out of the process and more companies will deal with their trading partners in China directly. “It is a change in trading behaviour that will come,” he says. The type of company that is already beginning to pay China directly can be as small as a UK travel agent that only makes two payments a month. For such a company, the executive says, "it is just like making a payment in any other currency".
For larger companies, however, the process is a lot more complex. Mr Veyres at BNP Paribas points out that adoption of renminbi trade settlement has been slower for multinational corporations because of the number of processes that need to be changed. “The multinational corporations have complex processes – procurement, sales, production, accounting, tax, legal – and all these stakeholders have to be aligned,” he says, adding that it takes longer for larger companies to make these changes.
Neil Daswani, Standard Chartered’s regional head of transaction banking in north Asia, says that there is an element of inertia with some companies using renminbi. This is due to their “hard-wiring”, he says, because they are so used to making payments in US dollars. “If the trading partner is used to invoicing in dollars, it is easier said than done to move from dollars to renminbi. Once they have tried it, they realise it works and it works efficiently,” he says.
The long game
It is still early days in the context of the internationalisation of the renminbi and although there has been a decline in settlement figures in recent months, the statistics do not stretch far back enough to establish any discernible long-term trends.
The recent Swift figures show that the renminbi has actually fallen down the rankings of global currencies, suggesting that the currency still has a long journey ahead of it before it is widely used internationally by companies to settle their trade transactions.
In October 2011, the renminbi fell to 17th place in the rankings of global currencies from 15th the month before. During the exponential growth of the early stages of renminbi cross-border settlement, the currency grew from 35th place to 21st in June 2011 before it reached that high point in September 2011.
While such figures could fuel scepticism about the dramatic rise of the renminbi, there are those who take a much longer-term view of the use of China’s currency. Norman Chan, chief executive of the Hong Kong Monetary Authority, points to the rise of the renminbi in the context of the growth story of China itself. Mr Chan cites figures from the International Monetary Fund (IMF) to show that China’s gross domestic product grew by 18 times between 1980 and 2010, and that the country’s contribution to global economic growth is projected to increase to 36% by 2016. The growth in trade between China and the rest of the world has also been significant, and Mr Chan quotes IMF figures of it increasing 25 times from $115bn in 1990 to close to $3000bn in 2010, making it the second largest trading nation in the world.
Wealth of potential
Given the size of China and its growing role in the global economy, it is perhaps surprising that the renminbi has not been used more to settle international trade. The currency is still greatly under-utilised when compared with the size of China’s economy and trade.
According to Swift figures at the end of June 2011, the renminbi’s share in world payments was 0.24%, compared with China’s share of world trade in 2010 of 11.4%. These kinds of figures are used to cite the potential that the renminbi has as an international currency, especially as China’s role in the global economy becomes increasingly prominent.
The Chinese authorities have been deliberate in their planning of the internationalisation of the currency, and despite the recent decline in renminbi settlement figures, most observers are certain that the progress of the internationalisation will continue in the same direction. In the early months of the cross-border trade settlement programme, there was some speculation that the internationalisation process could be reversed, if there was a change in policy, for example. However, when Li Keqiang, the vice-premier of China, visited Hong Kong in August 2011 and spoke about the government’s support of Hong Kong as an offshore renminbi centre, this was widely seen as an affirmation of China’s commitment to internationalising its currency.
Many commentators argue that the process of internationalising the renminbi has reached the point of no return, and now the process has gone so far that the Chinese authorities would be unable to reverse the lifting of the restrictions that have already been put in place.
Payment benefits
Aside from the potential of the renminbi because of the size of China’s trade with the rest of the world, there are benefits for companies that choose to pay their trading partners in the renminbi, rather than dollars or other international currencies.
The payment process is more streamlined as the transaction amount does not need to be converted into another international currency – such as the dollar – first. This removes the exchange rate risk and also means that the pricing is more transparent as money is not being lost in the exchange rate conversion.
Another benefit of settling in renminbi is the cost saving on the transaction. Craig Bond, chief executive at Standard Bank China, notes that Chinese suppliers are offering discounts to South African buyers if they settle in renminbi. Mr Bond adds that there is also a benefit when submitting value-added tax claims in China as the VAT claim is instantaneous if the payment has been made in renminbi, but it is a more lengthy process if it has been paid in dollars.
However, the processes that need to be changed go beyond substituting one currency for another on the invoice. And the bigger the company, the more complicated the processes are that need to be changed. For example, contracts have to be renegotiated and risk management has to be reconsidered.
A company that wants to make a cross-border renminbi settlement would have to open an offshore trade settlement account, receive the invoices in renminbi and then have to confirm that its Chinese supplier is registered to receive renminbi payments with the local authorities in China. And when the funds are converted into renminbi and remitted, a range of documents is needed to support the transaction. Navigating through all the requirements can be confusing for some businesses, and for this reason a number of banks have anticipated the advisory support that they will need before they start making trade payments in renminbi.
Regulation uncertainty
Awareness about the use of renminbi for trade settlements is increasing, but the rules and regulations are changing frequently, which adds to the confusion and the hesitation that many companies may have in making the change to using the currency to pay their trading partners.
The share of renminbi payments that are being made beyond Hong Kong still take up a small proportion of total cross-border settlement, but that could change in the near future as large multinational corporations make the changes necessary to align their processes and comply with the regulations, which are constantly changing.
The advisory role of banks has come to the fore as companies are required to keep on top of the changing rules. The pace at which the restrictions have been lifted has surprised many observers, and is part of the debate about how quickly the renminbi will become and international currency. However, it is still early days in the story of the growth of the renminbi and it is too early to make long-term predictions – based on current figures of trade settlement – about when the Chinese currency will become fully convertible, and eventually a reserve currency. Despite the projections based on the trade settlement volumes in recent months, the focus of the debate has not been about whether the renminbi will internationalise, but rather how quickly the renminbi will become an international currency.
