China continues to dominate world trade, despite recent efforts in some quarters to delink economies and supply chains from China. In February 2024, the Asian Development Bank’s Chief Economist Albert Park told CNBC that China is “still probably the number one trading partner for the majority of countries in the world,” describing the narrative about delinking China from the global economy as “overdone”.

Against this backdrop, the question of how to navigate the complexities of China’s financial landscape continues to be important, both for companies that are present in China, and for those that include Chinese companies in their supply chains. And one of the most significant features of this landscape is the internationalisation journey that China’s currency has undertaken in recent years – including the development of China’s offshore currency, CNH.

Understanding RMB

The terminology used to describe China’s currency is more complex than most. In a nutshell, the currency’s official name is renminbi (RMB), which can be translated as ‘People’s Currency’. The principal unit of account for RMB is the Chinese yuan (CNY). In practice, RMB and CNY can be used interchangeably. There are also two types of renminbi, CNY and CNH. Whereas CNY refers to renminbi that is traded onshore in mainland China, CNH is renminbi that is traded offshore.

The journey to internationalise China’s currency has been complex. In 2009, in the wake of the global financial crisis, a pilot project was introduced to allow cross-border trade settlements in Shanghai and four cities in Guangdong. Subsequent developments have included the creation of offshore renminbi centres, initially in Hong Kong and then in Singapore and London.

Today, China is the world’s second largest economy, and the largest trading nation, observes Venkat ES, head of Asia Treasury Product, Global Payment Solutions (GPS) at Bank of America. As such, “RMB (CNY) has been used in trading, investment and treasury management activities for many large MNCs that have direct presence or supply chain connections in China.”

Hong Kong is the largest offshore renminbi centre, with the deepest offshore RMB liquidity pool.

Vina Cheung, Global Head of RMB Internationalisation, HSBC

Offshore capabilities and the importance of Hong Kong

ES explains that since China launched its 2009 pilot scheme for offshore trade settlement in Hong Kong, more offshore capabilities have been added for CNH, including:

• Expansion to 20 other global centres for trade settlement.

• Launch of direct cross-border CNY payments between mainland China and all 20 offshore locations.

• Cross-border liquidity management through nationwide pooling schemes and launch of the Shanghai Free Trade Zone.

• Allowing offshore CNY for portfolio investments into China.

• Offshore CNY bond issuance (for financing).

• Offshore FX market (for conversion to any other currencies).

• Enabling fully-fledged transaction banking capabilities in CNY, “ie accounts, deposits, payments and receipts, (including real-time payments in Hong Kong), fixed deposits, CDs and other investment products.”

In 2023, says ES, the offshore CNY settlement market increased to around 12 million transactions, equating to US$66trn in value.

Vina Cheung, Global Head of RMB Internationalisation at HSBC, observes that “Hong Kong is the largest offshore renminbi centre, with the deepest offshore RMB liquidity pool, clearing approximately 80% of global RMB payments.” She says that with China now the world’s second-largest financier, “Hong Kong as an established international financial centre is the ideal conduit for settling RMB-denominated cross-border transactions in trade, project financing and capital raising.”

While Hong Kong has been a traditional hub for regional and global treasury centres for Western multinationals, says Cheung, “its market infrastructure and offshore RMB capabilities have allowed it to develop into the preferred regional treasury hub for Chinese corporates with regional and global ambitions.”

She adds, “Western multinationals have adopted a more prudent approach in recent years, with careful assessment of factors such as the cost of RMB financing, the products with which to hedge RMB-related risks, and the solutions with which to manage and optimise RMB surplus liquidity.”

From trade settlement to financing

Trade settlement has been a key aspect of RMB internationalisation. In the past, companies trading with suppliers in mainland China would conduct trade using USD, but following the introduction of the cross-border trade settlement programme in 2009, corporates have been able to settle foreign trade in RMB.

There can be significant advantages to this approach. A Corporate Handbook published by BNP Paribas, All About RMB, notes that when dealing in foreign currencies, Chinese entities bear the FX hedging costs. “As such, they include in their prices a flat buffer fee which lacks transparency. This buffer covers the FX exposure hedging price with Chinese banks; moreover, the FX hedging is usually not perfect, and there is a residual risk left.”

The report notes that this buffer is no longer needed when settlement takes place in RMB – so overseas corporates may be able to achieve a price discount of 1%-3% when dealing with their Chinese counterparts in RMB. Other benefits include the opportunity to extend payment terms, which are typically limited to a maximum of 90 days when trade is settled in foreign currencies.

Where offshore investment products are concerned, one significant milestone was the creation of the dim sum bond market in 2007. Dim sum bonds are denominated in RMB and are typically issued in Hong Kong.

They present an opportunity for investors to diversify their foreign currency holders, and companies can also use the proceeds of dim sum bond sales to settle cross-border trades.

In terms of financing, companies may be able to access cheaper financing costs in RMB compared to USD. Given current interest rates in EUR/USD, ES notes that CNY/CNH now represents a cheaper alternative for corporates and institutions looking to borrow. He adds that increased lending in CNH presents an opportunity to increase its liquidity and the use of CNH in transactions across businesses.

Nevertheless, CNH funding is not always the most attractive option. David Keong Fatt Wong, Director of Global Treasury Advisory at Deloitte in China, says the firm has helped state-owned enterprises to set up regional treasury centres in Hong Kong in order to serve their companies outside of China.

“We do not see any CNH financing in their programmes for short or long-term requirements – they’ll still rely on project financing or structured financing in USD, for which the cost of funding is still pretty attractive,” he says, adding that more initiatives are needed to encourage state-owned enterprises with RTCs in Hong Kong if the use of CNH financing is to increase, alongside education for MNCs and SOEs.

More initiatives are needed to encourage state-owned enterprises with RTCs in Hong Kong if the use of CNH financing is to increase, alongside education for MNCs and SOEs.

David Keong Fatt Wong, Director of Global Treasury Advisory, Deloitte

Future developments

Cheung predicts that the development of the CNH financing business could enhance Hong Kong’s resilience as an international funding hub.

“Due to the linked exchange rate system, Hong Kong’s bank lending faces challenges when US interest rates are high, just like now,” she notes. “Diversifying into other currencies from economies with divergent monetary policies, such as RMB, could help mitigate this vulnerability.”

She adds that a diverse funding hub with more businesses in RMB can spur on financial innovation, encouraging the development of new financial instruments, products and services tailored to the RMB market.

ES, meanwhile, points to the digitisation of RMB in order to facilitate further interoperability between China and Hong Kong, with CNH positioned as a parallel currency to the Hong Kong dollar (HKD) in order to facilitate transactions.

“Currently in the retail space, most transactional functions have both HKD and CNH options,” he observes. “If this can be expanded for corporates in the future, CNH may become more commonly used in local markets.”

Other notable developments include the rise of China’s central bank digital currency (CBDC), the eCNY. First piloted in four cities in 2020, the digital currency has now been rolled out to a number of provinces and cities, and has around 260 million wallet users. The pilot has also recently been expanded in Hong Kong.

ES explains that future expansion could see the eCNY used more broadly in the retail and wholesale space, which could reduce the need for human involvement in cross-border transactions via the use of smart contracts.

Finally, ES predicts that if capital controls in China are further relaxed, “it may give corporates and institutions added confidence in holding CNH/CNY for longer in HK/PRC,” as an alternative to using Swift FX transactions followed by immediate repatriation.