China’s muscle

The rise of the redback

The ascendancy of the Chinese renminbi seems assured. From his Hong Kong vantage point, THOMAS POON foresees the emergence of China’s RMB as the world’s next reserve currency, challenging the hegemony of the dollar, the euro and sterling.

Will it take five years? Ten? Twelve? Commentators differ on exactly when the renminbi (RMB) will become freely convertible and stake its place among the world’s top three currencies.

But, barring a major upset, it’s only a matter of time before what some Chinese term the “hongbi” – or “redback”, to rival America’s greenback – becomes a reserve currency. This year, HSBC’s Trade Confidence Index predicted it would soon overtake the British pound sterling as the third most popular currency for trade settlement.

The world is ready for the renminbi. Given China’s growing influence as the second largest economy and the biggest global exporter, the continuing dominance of the dollar and the euro has looked increasingly untenable.

And the need for a third international financial centre in Asia – after New York for America and London for Europe – is also clear. It’s a gap the Chinese authorities are keen to fill.

In recent years, they’ve moved nimbly to liberalise the renminbi while striving to maintain control of their economy and cross-border flows of capital. So far it’s a success story – though persistently high inflation is a creeping concern. Right now, there’s no consensus on business. Will the “redback” be a red herring – or will it bring fresh opportunities? I have no doubts about the implications of the currency’s rise. If the RMB isn’t a concern to you now, it will be.

Measures to internationalise the RMB began some time ago. It’s seven years since Hong Kong banks began to offer offshore renminbi accounts. Currency swap agreements with foreign central banks have been in place since 2000.

Offshore bonds, dubbed the “dim sum” market, were launched in February 2010, and there was keen interest when the Hong Kong Monetary Authority, with China’s backing, said it would allow RMB bond business to be carried out in Hong Kong.

But internationalisation is likely to be a long process. The RMB can only become a reserve currency when there’s much greater access to the mainland bond markets.

And there have been setbacks: last November, for instance, it emerged that Hong Kong had exceeded the RMB conversion quota set by Beijing for trade settlements in 2010, due to the growth of earnings from exports to the mainland. Until that announcement, paradoxically, outside observers hadn’t realised a quota even existed.

The quota was used up once again just before the end of September 2011. As a result, the quota for the fourth quarter was doubled to RMB 8 billion.

China’s stated ambition to develop Shanghai into a major international financial centre by 2020 suggests a possible timetable for full RMB liberalisation. But, of course, such a transformation would only be feasible if the RMB were freely convertible across the globe.

For now, though, the precise schedule matters less than the direction of travel. What we can say for sure is that, in terms of momentum for growth, the RMB is right on track: the volume of trade settlements in RMB in the first four months of 2011 amounted to 510 billion – more than in the whole of 2010.

Thanks to steady liberalisation, foreign businesses can already buy and sell directly in RMB, cutting out the need for complex conversions. In this sense, “internationalisation” is already here. Any company importing from or exporting to China can already denominate in RMB. Chinese exporters certainly need special approved status as a “mainland designated enterprise”, but this process is relatively quick.

There are potential advantages to both Chinese companies and the foreign businesses they deal with. Exposure to foreign exchange rate is reduced. Transactional costs shrink and, with the need for hedging eliminated, those costs disappear too. There’s growing institutional interest in investing in RMB or raising RMB bonds, as well as receiving trade settlements in the currency.

Drawing on a heritage in Hong Kong and Shanghai that dates back to 1865, HSBC has taken a lead in such deals. The importance of the RMB is rising – we estimate that, by 2013-15, more than $2 trillion – or half of China’s total trade flows with emerging markets – will be settled in that currency.

Last year, HSBC designed the first transaction for a UK business to be settled in RMB and recent high-value transactions have included our role as joint arranger for VW’s sale of 1.5 billion yuan of five-year bonds in Hong Kong.

All the same, in large tracts of the economy, there’s still some wariness and confusion. The major problem is a lack of understanding about what all this means – both within and outside China. Many of our customers inside China say they plan to switch some trade to RMB next year, or will consider doing so, depending on the price. But around 20 per cent acknowledge they have a problem switching trade into RMB, because their counterparts in other parts of the world don’t understand it, or the banks there don’t provide these services.

Other businesses raise concerns about the supposed bureaucracy of the switching procedure. In fact, though, the documentation is no more onerous than their current settlements in American dollars. It’s very, very straightforward.

THOMAS POON is Head of Business Planning and Strategy, HSBC, Hong Kong

“A simple way to be competitive”

UK companies disconcerted by the “shock of the new” might take comfort in the long history of China’s currency, advises IAN TANDY: it’s been used in foreign trade since the 13th century.

What do UK businesses have to gain by becoming early adopters of the renminbi?

The answer is that it’s becoming increasingly easy to trade with China, thanks in large part to the Chinese government’s recent liberalisations. And there are significant advantages for British exporters and importers alike.

People used to try to export to China on 30-day net terms, and in sterling. Now there’s an opportunity to price in RMB – which is clearly attractive to Chinese customers – while offering payment terms which will allow you to compete more effectively with other countries or competitors.

There are no restrictions on the level of RMB that Chinese companies can pay out. If you’re already exporting to China, your Chinese customer is currently having to convert to RMB – taking that conversion out of the cycle should be a fairly strong negotiating point.

It’s possibly an even stronger issue for those importing from China. At present Chinese suppliers will price the potential appreciation of the RMB into the dollar price they quote. By stripping that conversion out, an importer has greater leverage to negotiate.

You might also be able to widen your supply base by including suppliers who are only willing to deal in RMB.

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