China overtook the US in 2013 to become the world’s largest trading nation, with its trade in goods passing the USD4 trillion mark. This rapid growth has created significant opportunities for international businesses. But global use of China’s currency, the renminbi (RMB), remains low despite its increasing internationalisation.
Although the RMB is a relative newcomer as a global trade and investment currency, it has evolved quickly as China has implemented a series of reforms to remove barriers to its use. China is pursuing a three-stage approach: expanding the RMB’s role in foreign trade settlement, increasing its use in cross-border investment, and finally establishing it as a reserve currency. The first stage is well underway. The RMB was used to settle 18 per cent of China’s total trade last year, up from 3 per cent in 2010, according to HSBC Global Research.
Significant progress has also been made in the second stage of development. The offshore RMB bond market – so-called dim sum bonds – has doubled in size each year since 2008, while offshore RMB centres have been established in locations including Hong Kong, Singapore and London. As of March, we estimate that more than 10,000 financial institutions were doing business in RMB, compared with just 900 in June 2011.
But despite the RMB’s increasingly international status, many businesses that trade with China have yet to embrace the currency, according to a new survey by HSBC. The study, which covered more than 1,300 businesses in 11 countries and territories around the world, found that only 22 per cent of companies are currently settling their cross-border business with or from China in RMB. Outside mainland China, Taiwan and Hong Kong, RMB use is led by France and Germany – two countries that have both focused on developing stronger trade relationships with China.
Despite the RMB’s increasingly international status, many businesses that trade with China have yet to embrace the currency
Strikingly, around two-thirds of businesses in mainland China and Hong Kong think that foreign firms that do business in RMB benefit financially and build stronger trading relationships. Overseas companies do not all share this view, with awareness of the RMB’s potential advantages varying significantly around the world.
There are signs that the number of businesses using RMB for cross-border trade settlement will increase, with larger companies leading adoption. Around 42 per cent of survey respondents with turnover of more than USD500 million said they are doing some business in RMB, compared with only 15 per cent of companies with turnover of between USD3 million and USD5 million.
Around a third of businesses that don’t use the currency today said they intended to do so in future. Their main incentives for adopting the RMB are to win more business and to meet requests from trading partners, with businesses in the UK, mainland China and Taiwan most likely to switch.
In addition, almost six in ten businesses that already use the currency plan to expand their RMB activities over the next 12 months. Their principal reasons for doing so are convenience, reduced foreign exchange risks or costs, and requests from trading partners. But the survey respondents also highlighted a number of obstacles to the currency’s adoption, including regulatory uncertainty, complex documentation and trading partners that are not yet ‘RMB-ready’.
Undoubtedly the RMB will become more widely used. At a key policy meeting last November, China’s leaders underlined their commitment to accelerating financial reforms. They have implemented a number of new measures, including a doubling of the daily trading band for the RMB-USD rate and an easing of restrictions on cross-border capital flows in the Shanghai Free Trade Zone, which is acting as a test bed for many of the country’s reforms.
Given the scale and speed of these recent reforms, HSBC now expects that the RMB will be fully convertible by 2017, several years earlier than previously anticipated. In the shorter term we estimate that it will be used to settle 30 per cent of China’s total trade by the end of 2015. The internationalisation of the RMB is gathering pace, and businesses everywhere should be considering the implications of a currency that’s already more ‘mainstream’ than many people realise.