Frankie Au, Head of RMB Products, Transaction Banking at Standard Chartered, supports this view. He says the headwinds preventing corporates from adopting the renminbi have disappeared, especially regarding the two-way flow of the currency. “China has also relaxed hedging rules, allowing corporates to hedge renminbi exposures offshore, which provides much more flexibility for corporates operating a renminbi portfolio,” he adds.
Because of these measures, Au says that there is growing curiosity from corporates about how to use the currency and what benefits it can offer. “Some companies are being forced to consider the currency because they are receiving requests from their counterparties to be paid in renminbi,” he comments. “However, many more are thinking strategically and looking at how the currency can enable them to achieve better pricing, win more business and reduce the cost of doing business with Chinese counterparties.”
Citi’s Patil agrees, noting that interest in the currency is especially high amongst Asian companies. “Flows between China and the rest of Asia are largely denominated in US dollar,” he says. “But as the renminbi has internationalised, more Asian companies are adopting it for their dealings with China. By doing so they are achieving greater efficiency and pricing advantages over using the US dollar. As a result, I expect to see a lot more intra-Asia trade settled in renminbi over the coming years.”
For all the pricing and efficiency benefits companies can achieve using renminbi for trade with China, Patil warns that adoption cannot happen overnight. Both Au and Patil recommend that corporations carefully consider their renminbi strategy to ensure it is executed effectively.
Indeed, there are multiple commercial and operational factors to consider. For instance, on a commercial level, it is likely companies will need to adjust their organisational and procurement policies to accommodate the new currency. Corporates should also renegotiate payment terms with suppliers to reflect the change.
From a treasury perspective, Citi’s Patil explains that treasurers must ensure the company has settlement accounts and intercompany agreements in place to support the currency. He adds that treasury teams will also need to investigate their cash management infrastructures. Doing so will ensure they optimise how they use the currency.
Treasury must also play a key role in working through and solving the unique issues encountered when using the renminbi, as highlighted by HSBC’s 2017 Renminbi Internationalisation Survey. Corporates noted a number of issues that can arise when using renminbi for cross-border business, including a lack of solutions for surplus cash onshore, unclear and shifting regulations and onerous documentary requirements.
To work through these considerations and challenges, many corporates are focusing on small-scale experiments with the currency. Citi’s Patil says most of the bank’s clients are adopting renminbi in a handful of legal entities. “This sandbox-style approach gives the business the opportunity to work through all the nuances associated with using the currency without the risk of full-scale adoption,” he explains. “Most importantly, it gets people comfortable with the currency, which is crucial for long-term usage to occur.”
Renminbi’s Belt and Road boost
A crucial driver for greater renminbi internationalisation will be China’s ambitious BRI. The project, which will boost the flows of trade, capital and services between China and the rest of the world, will not only increase trade with Belt and Road countries but also promote the use of renminbi as a trade currency.
“Promoting the international use of the Chinese currency is one of the stated objectives of Belt and Road,” says Vina Cheung, Global Head of RMB Internationalisation at HSBC. “Because of this, we expect the currency to be used increasingly for trade and investment flows along the Belt and Road. We also expect to see a sizeable renminbi offshore-debt market emerge to fund the infrastructure development.”
Standard Chartered’s Au adds that it makes sense for the renminbi to be used for subsequent transactions if these infrastructure projects are funded in the currency. “This will avoid a currency mismatch, removing the currency risk and reducing the cost of the project overall,” he says.
The corporate world agrees. HSBC’s renminbi survey shows over 70% believe that BRI will have either a significantly positive or a positive impact on renminbi usage in the future. In another survey conducted by China Construction Bank, 72% of all respondents said the Belt and Road initiative is having the biggest impact on RMB internationalisation.
To support this, the Chinese government is determined to improve the currency’s infrastructure, as Yin Yong, Deputy Governor at the People’s Bank of China (PBOC), explained in a speech last year: “The PBOC will continue to improve the renminbi cross-border payment framework and make the renminbi play an important role in pricing, settlement, investment, financing and trade. The currency’s internationalisation will be a medium- to long-term process backed by China’s strong economy.”
For more on China’s BRI and what it means for your business, read our deep dive into the topic in the July/August edition of Treasury Today Asia.
Will China become the world’s leading currency?
Overall, the signs for the renminbi are positive. HSBC’s 2017 Renminbi Internationalisation Survey shows that more businesses not currently using renminbi for cross-border transactions are planning to do so in the future. This then begs the question: will China achieve its ambitions and become a truly international currency? And will this be at the expense of the US dollar?
“The renminbi will become a global currency,” predicts Walsh. “It won’t displace the dollar, however. In fact, I believe there is room for two strong reserve currencies. The big question is how long this will take. I used to think it will happen in ten years but now I think it will be closer to 20.”
Standard Chartered’s Au shares a similar view. “The renminbi is on the rise,” he says. “It will take time for it to reach its potential but it is heading in the right direction and I believe will sit alongside the US dollar as one of the world’s major reserve currencies.”
Citi’s Patil expects that geopolitics will play a big role in the renminbi’s future. “China will become an increasingly dominant player on the global stage, especially as the US takes a more protectionist stance and the renminbi will follow,” he says. Patil does, however, note that this will depend on continuing deregulation and increasing liquidity in the offshore renminbi market.
HSBC’s Cheung believes renminbi internationalisation is inevitable. “Renminbi usage shall reach the stage of balancing China’s influence as a leading trading nation and the growth engine for the world,” she says.
It may be easy to dismiss the renminbi’s potential to challenge and displace the dollar. But it has only been 100 years since the US dollar displaced the British pound – so who’s to say another change isn’t on the horizon?