With the future of the euro being called into question and many developed economies struggling to grow, transaction banks are looking to take advantage of the opportunities arising from the internationalisation of the renminbi.

Ask any banker how they view the global economy, and their response will almost certainly in some way relate to the eurozone. While a year ago there was a sense that the global economy was recovering from the 2008 financial crisis, recent events in Europe have cast uncertainty over the prospects for global growth.

Clients of transaction banks, wherever they are in the world, are not immune to events in Europe and many have resorted to a wait-and-see mode, preferring not to make any key strategic or investment decisions in such an uncertain environment. In these testing times, however, there are opportunities for transaction banks to cement client relationships, by helping them work through the implications that events in the wider economy will have on their business.

The International Monetary Fund’s (IMF) most recent World Economic Outlook report, released in April 2012, was entitled “Growth resuming, dangers remain”, and it said that while prospects for global growth are gradually strengthening, downside risks remain elevated. The report paints a world economy that is split between the developed and developing economies of the world.

The IMF projects that many developed economies would continue to make slow recoveries, while growth would remain solid in most emerging economies. Global gross domestic product (GDP) growth was estimated to fall from 2011’s 4% to 3.5% in 2012. Meanwhile, real GDP growth in emerging and developing economies is expected to slow from 6.25% in 2011, to an estimated 5.75% in 2012, although in 2013 this growth is expected to gather pace to hit 6%.

Europe and beyond

Events in markets outside of Europe have further added to global economic uncertainty. In the US, employment rates are slowing, politicians are split on how to deal with the 2012 expiration date on the tax cuts introduced by former president George Bush and opinion is divided on whether the country's debt ceiling needs to be increased. Such debate comes at an already uncertain time as November’s US presidential election is fast approaching.

Meanwhile, slowed growth in developed economies has had an impact on exporting countries in the developing world. Recent figures suggest that China’s manufacturing output is slowing, which has fuelled debate over whether the country is heading for a hard landing.

A change in trading patterns may offset the impact of events in the US and Europe, however. Economists are predicting that global power will shift away from Europe and the US to emerging markets, which in the future will account for the largest proportion of global economic growth.

When the financial crisis first hit in 2008, there were many public discussions about Asia, and whether it had decoupled from the West and would avoid the repercussions of the US subprime crisis. Now there is a realisation that no economy is immune from the current events in the eurozone, but there are factors that temper this pessimistic outlook.

There has been a rise in intra-Asian and South-South trade between emerging economies, such as Asia and Africa, and Asia and Latin America. These patterns, along with rising consumption in emerging economies, could offset some of the impact of a slowdown in the US and Europe. Such markets are presenting prospects for growth and many transaction bankers are optimistic about the opportunities of the emerging markets.

Rise of the renminbi

While the euro faces a difficult, even uncertain, future, the transaction banking industry’s dialogue on the rise of the renminbi as an international currency is overwhelmingly positive. The slowing of the US and European economies coincides with a gradual shift away from the US dollar and the euro. The renminbi is now on a path to becoming an international currency, and even countries such as Chile and Nigeria are beginning to hold a proportion of their international reserves in it.

The Chinese government is aiming to internationalise the currency so that one day it will be fully convertible, allowing people to buy, sell, lend and borrow freely across China’s borders. Given the size of the country’s economy, and its role as the largest exporter in the world, it is perhaps surprising that the currency has not been used more.

Figures from payments network Swift, dated April 2012, show that the renminbi is the 16th most popular global currency for world payments with a market share of 0.34%. Transaction bankers expect renminbi usage to climb, and are preparing their clients for this changing trend. 

The internationalisation is expected to go in three stages. First the remninbi will be used for trade settlement, then in the financial markets and for investments, and finally, as a reserve currency. One reason for this gradual introduction is that China is reluctant to introduce policy changes too quickly as there is the fear that money could rush in or rush out and cause instability in the global financial markets. This gradual policy liberalisation is exciting for transaction banking, particularly in an environment where rules and regulations have been created to clamp down on the activities of the banking industry in the wake of the financial crisis.

Easing in

The process of opening up the renminbi for trade has also been done in stages by the Chinese authorities. Now, if a transaction has genuine trade underlying it, there are few restrictions on using the Chinese currency for companies outside of China.

Payments began in July 2009 when cross-border renminbi settlement was introduced to five pilot cities in China, which were allowed to settle with companies in Hong Kong, Macao and the countries that make up the Association of South-east Asian Nations. In June 2010, this pilot was expanded to 20 Chinese provinces 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.

The rules and regulations surrounding the renminbi are often confusing, which has opened up opportunities for transaction banks to provide advisory services to their clients who wish to settle their trade in the Chinese currency.

The drive for the adoption of the renminbi is coming from both sides of trade relationships: Chinese companies are asking their international trading partners to pay them in renminbi, while some foreign companies are asking their Chinese counterparts to prepare for renminbi payments. Renminbi payments are quicker, more efficient and reduce the foreign exchange risk for Chinese suppliers, while for companies doing business in China, paying in renminbi can give them a competitive advantage.

Shifting balance

There was an exponential rate of growth in the use of renminbi for trade payments in 2011. At the end of the year, however, the settlement figures for renminbi slowed, dampening optimism over how quickly the currency will become internationalised. However, the transaction banking industry takes a long-term view of its role, and given how the balance in the world economy is shifting, few would doubt that one day the renminbi will be an international currency and observers argue that the trend of internationalisation cannot be reversed.

In May 2012, figures from Swift showed that the renminbi was the third biggest currency in the global issuance of letter of credits by value, after the US dollar and the euro. The renminbi now has a 4% market share in the global issuance of letters of credit by value, after the US dollar with 84.4% and the euro with 7%.

Such statistics are grounds for optimism and show that while there are concerns about the impact of events in the eurozone, there are still many other opportunities in emerging markets, and for the transaction banking industry as a whole. 


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