Treasury Today Country Profiles in association with Citi

Education and awareness key to RMB trade gains, says survey

Containers at Hong Kong commercial port

Competitive advantage is falling by the wayside as 52% of companies admit they have a limited understanding of the internationalisation of RMB.

The results of a new survey reveal that 52% of companies have a limited understanding of the processes behind the progressive internationalisation of the RMB and may be missing out on a competitive advantage as a result.

The study, commissioned by HSBC and conducted by Neilson during May and June 2013, looked at the usage of RMB by more 700 international businesses across China, Hong Kong, Australia, Singapore, the UK, the US and Germany. Questioned on their reasons for using or not using RMB for trade and investment activities, and the difficulties or barriers they encounter in its use, it seems just 11% of businesses surveyed in Singapore, 11% in the UK, 9% in Germany, 9% in the US and 7% in Australia currently use RMB in their trade activities. Over half of these (51%) said that their RMB usage would increase if the processes involved were made easier.

The survey does however show that 50% of all international companies in Hong Kong and 30% in mainland China are using RMB to conduct cross-border business. There is, of course, a natural trade flow between China and Hong Kong, notes Simon Constantinides, HSBC’s Regional Head of Global Trade and Receivables Finance, Asia-Pacific, so one of the main issues to be drawn from the survey regarding cross-border use of RMB is that “awareness and education” are a matter of priority for other potential users.

Indeed, 61% of Chinese companies said their counterparties were unwilling to consider using RMB, the main reason (cited by 38% of respondents) being the perception that there was “no clear benefit in using RMB”. In addition, 34% of Chinese companies said their counterparties were simply unwilling to use RMB and 31% said they were not fully considering its use.

Despite the apparent lack of uptake to date, 24% of those surveyed signalled their expectation to be using the currency within the next five years, most (59%) citing it as a means of mitigating FX risk. Other reasons included achieving better pricing (42%) and offsetting market disparities between onshore and offshore RMB markets (39%).

Trade

HSBC’s economists believe that 30% of all Chinese trade will be settled in RMB by 2015, which equates to around $2 trillion a year. Much of this will come from beyond the Hong Kong-China trade flow, says Constantinides. The banks’ role of educating businesses and driving up awareness of the benefits of using RMB is therefore seen by him as an opportunity to engage with clients and demonstrate the available options “to enable them to make appropriate business decisions”.

Client reactions to date, he says, range between caution and enthusiasm. One of the key considerations in dealing with another currency must be risk management, especially around hedging risk. Because most corporate treasurers are fully aware of this, the majority say they need to better understand and more fully consider the RMB proposition. “It doesn’t happen overnight,” says Constantinides. “It takes time working with the client to explain and show them the options and to help them understand the process.”

Of those that have discovered the benefits of trading with RMB, the survey shows that many expect to do more business using it. “We see 26% of those trading in RMB expecting growth of more than 10% this year and 73% of all companies using RMB expecting their cross-border business to grow in the next five years,” notes Constantinides. “When companies start trading in RMB there is a clear indication that many believe it will help grow their activities.” The main drivers for those already using RMB were FX risk mitigation (48%), meeting demand from their counterparties (46%) and for convenience (42%).

Payments

One of the key findings of the survey that could influence uptake was that 53% of Chinese businesses surveyed said they would offer discounts of up to 5% for transactions settled in RMB. “We’ve had some customers tell us that they have saved even more than that,” says Constantinides.

He explains that if a Chinese exporter strikes a price knowing it will paid in six months, it will build into that pricing an assumption as to where the exchange rate will be at that point to try to move the FX risk off its books. Whereas some exporters may retain any additional profit this generates, others may view it as an opportunity to be more competitive by sharing it with their customers. “With a slower economy in China any competitive edge is going to be welcomed.”

Successful internationalisation of RMB lies in the management of its emergence onto the markets, the authorities not wanting to suddenly choke the market and create volatility. The Peoples Bank of China (PBoC) and State Administration of Foreign Exchange (SAFE) have worked hard over the past three years to deliver a progressive release. “When you are talking about the world’s second largest economy, its currency cannot sit on the side-lines,” states Constantinides. “In the next few years we forecast that China will become the largest two-way trade market in the world.” As imports in China are forecast to grow, and perhaps exceed exports, for companies buying and selling here there is a “natural attraction” to buy and sell in the same currency, driving increased usage of RMB.

By setting up a free trade zone in Shanghai, for example, and by working with the London Metal Exchange (and its new owner, Hong Kong Exchanges and Clearing), to possibly become the first foreign exchange to open a commodities warehouse in mainland China, the RMB is seemingly heading in the right direction, notes Constantinides. “The house-view from our chief economist in China is that RMB will be fully convertible by 2017.”