This issue’s question

“More and more Western companies are looking at using the RMB to carry out and settle cross-border trade deals. What are the benefits and challenges of trading in RMB? Also, have there been any recent changes which will make RMB trade settlement easier?”

While Hong Kong remains the most important offshore renminbi (RMB) hub, there is now competition from Europe, including Frankfurt, London, Luxembourg, Paris, Zurich and growing numbers of Asian cities, in addition to Toronto, Canada and Doha, Qatar. The markets have broadly adopted the currency in financial and capital markets transactions, and the UK and French governments have successfully issued their own RMB-denominated bonds. The RMB is now in the top five currencies by value according to the RMB Tracker published by SWIFT, surpassing the Canadian and Australian dollars.

The Chinese currency’s adoption in commercial flows for goods and services also continues its strong momentum. Initial pilots with intercompany flows have expanded to third-party payments and collections in RMB. There are clear financial and operational advantages for onshore parties, from reduced hedging and transaction costs, simpler documentation requirements and faster payment cycle times. Commercial discounts are becoming the norm for settlements in RMB, according to market sources. Entire industry sectors transacting in foreign currency with China could benefit by redenominating flows in RMB.

RMB hubs serve as conduits for transactions between counterparties onshore and offshore for both commercial trade and financial purposes. Hong Kong has maintained its competitive edge with the largest pool of liquidity from retail and wholesale RMB deposits and financial products in RMB. Initiatives such as extended clearing hours for real-time gross settlement in Hong Kong to cover business hours in Europe and North America, and the Hong Kong-Shanghai Stock Connect, denominated in RMB, supports continuing growth in value and volume of RMB transactions.

Some of the hubs will play a role in facilitating specific RMB flows in their respective markets. The RMB leg of foreign exchange flows in London may be convenient to settle through that city’s hub, if London’s financial community fully supports it and participates. Likewise, the flows through the Luxembourg hub might be highly correlated to the investment funds business.

The challenge for China is the RMB user-experience. While economic considerations will be the main drivers, the RMB also needs to be as user-friendly as other currencies for adoption to continue. Provided that simple and clear payment instructions can be exchanged, processing time frames and value dates are defined and respected, the risk factors are clear, and transaction costs are minimised, adoption of the RMB should continue.

There is great anticipation from all parties for the China International Payments System (CIPS), which is expected to streamline the current process for global payments denominated in RMB by connecting to the China National Advanced Payment System (CNAPS), a domestic payments infrastructure platform. It is likely to reduce the flows through all but the largest hubs. The launch date for CIPS has still to be confirmed, but People’s Bank of China and other Chinese banks are working diligently to upgrade CNAPS and simplify and standardise the routing instructions. The RMB needs operational efficiency as part of its global march towards internationalisation.

The RMB is now the most active currency used by Asia for payments with China and Hong Kong. From 2012 to 2015, the Chinese currency moved from position number five to the top currency used in Asia Pacific to do business with Greater China. On average, 31% of payments in Asia Pacific with China and Hong Kong are now made in RMB. This growth is driven by the increase of RMB usage in most Asian countries to trade directly with China and Hong Kong. The new appointments of four clearing centres (South Korea, Malaysia, Thailand and Australia) within the region should also have a positive impact on RMB adoption, solidifying the important role of the currency within Asia Pacific but also abroad. Overall, the RMB remains the fifth most active currency for global payments, accounting for 2.07% of payments worldwide in 2013.

International usage of the RMB is in its early days. However, there are many benefits to be achieved through the liberalisation and promotion of the use of RMB beyond China’s borders. Chinese corporates, in particular SMEs, can use RMB for cross-border trade instead of a foreign currency and avoid FX costs and exchange risks. In addition, foreign corporates paying in RMB can do business with more corporates in China, thus increasing the overall size of trade.

Large corporates can manage their RMB more globally and, over time, diversify their assets and protect against depreciation of one currency. From a macroeconomic point of view, a third ‘world currency’ could be beneficial – particularly one from Asia, in which countries could hold their reserves, especially as trade between Asian countries increases. During the recent financial crisis, banks in some Asian economies that use the US dollar experienced liquidity issues because of the increased cost of funding.

Recently, the Chinese FX market has expanded rapidly amid China’s partial relaxation of its capital account and a jump in offshore RMB trading. The Chinese authorities have provided intraday funds of up to RMB 10bn to authorised institutions participating in RMB business in Hong Kong to ease concerns about CNH liquidity upon the launch of the HK-Shanghai Connect. This, along with the ‘dim sum’ bond market, has further opened up Chinese onshore equity and bond markets. These moves have led to greater international flows into RMB, driven by institutional investors and this jump in the volume of liquidity and foreign-market players has coincided with a reversal of bets on the Chinese currency as a one-way appreciation play.

Looking to the Western world, use of the RMB from a payment perspective is showing strong growth and rightly so – the benefits can be plenty. Potential price discounts continue to be the primary reason corporates choose to denominate their trade settlement in RMB. And according to HSBC’s recent RMB Internationalisation Survey, some corporates are already enjoying meaningful discounts.

This year’s survey also revealed two more drivers behind the decision to settle cross-border transactions in RMB. Firstly, more corporates are getting requests from their trading counterparts in China to settle in RMB. Previously, Chinese corporates were reluctant to consider their home currency but over the past few years, there’s been a marked improvement in Chinese companies’ understanding of the benefits of receiving payments in RMB. Thus, requests from trading counterparts in China are becoming an additional driver for Western corporates to consider RMB trade settlement.

Secondly, there is an increased interest in using the RMB to carry out and settle cross-border trade deals due to the associated reduction in FX risk and costs at both ends of the buyer/supplier chain. Using RMB becomes quite obvious when coupled with a potential pricing discount from a Chinese supplier as they can get rid of the FX premium built into the US dollar pricing. From an overseas buyer’s perspective, if they are managing FX in offshore markets, they will have access to more sophisticated hedging products and greater pricing transparency if they agree to settle in RMB.

Of course, the RMB’s journey to becoming an internationalised currency has not always been smooth – but the challenges can largely be categorised into three main obstacles.

One consistent challenge is educating global companies about the benefits of using RMB. Outside of China and Hong Kong, companies often have a lower understanding of the increasing liberalisation of the RMB. Indeed, one of the misconceptions we seek to address is that the aim of promoting the RMB is to replace the dollar as a settlement currency for trade. In reality, banks are providing RMB settlement as an additional currency option for companies to consider. For example, when Western corporates get a dual quotation from their Chinese supplier, their bank should be able to advise them on which currency is of greatest commercial benefit for them.

From an end-to-end operational perspective, preparing a company for the flexibility of RMB adoption means they need to take action on RMB settlement today, to ensure they are RMB-ready. Each business operation is different and being RMB-ready opens up opportunities for the future.

Another issue for corporates to consider is whether price discounts are available with their buyer/supplier relationship. Sometimes receiving dual quotations from Chinese suppliers typically used to pricing in dollars can be problematic. Price discounts might not be available in all instances and it is important to partner with a bank that is strongly positioned both within and outside China and that can undertake a benefit assessment with each client.

The good news is that recent changes are making trading in RMB increasingly easy. The Shanghai Free Trade Zone (SFTZ), for example, provides benefits for settling RMB with international markets with further streamlined processes, as well as providing SFTZ entities the choice between a CNY (onshore) or CNH (offshore) foreign exchange rate. Another upcoming change is the introduction of the China International Payments Systems (CIPS). Currently, due to local clearing systems being used to settle cross-border payments, RMB cross-border payment processing isn’t considered internationally standardised. CIPS is an important infrastructure development for RMB clearing globally and is expected to launch in the later part of this year.

Finally, the potential inclusion of RMB into the IMF’s special drawing rights (SDRs) is increasing confidence in holding and using the RMB for trade settlement, investment, financing, and for reserve purposes.