The Renminbi (RMB) is now a globally recognised currency that everyone is watching. As traders become more aware of the benefits of transacting in this currency and global offshore RMB centers emerge, demand for and growth in RMB transactions and investments are steadily increasing.
China started gaining prominence under the leadership of Deng Xiaopeng, when the country began opening its doors to world trade. In the 31 years from 1979 to 2010, China’s average gross domestic product growth was 9.9 per cent. During this period the country’s economic growth surpassed Italy, the UK, Germany, France and Japan and was second only to the US.
Trade between China and the rest of the world grew from $2.2 trillion in 2009 to $3.64 trillion during 2011, and in the first half of 2012, it reached $1,840 billion. This growth in trade was accompanied by a strong momentum in the volume of RMB trade settlement which, as of December 2011, reached CNY2.59 trillion. This volume is expected to grow by 20 per cent by 2015 to CNY 6.5 trillion.
According to the SWIFT RMB Tracker of Aug 2012, 20 per cent of the 158 countries that transact with China and Hong Kong made at least 10 per cent of their payments value in Renminbi. On average, four per cent of all payments’ value with China and Hong Kong was in RMB. The Gulf countries, Singapore and the UK were very strong performers, with Canada and Germany also showing increasing activity. Adoption by the US, Japan and Australia remains low.
The growth in RMB settlement is driven by corporates who are becoming increasingly aware of the benefits of transacting in this currency. Expanding buyer and supplier networks not only in China but also across the ASEAN countries, shorter cash conversion cycles due to improved efficiency, hedging cost reduction and lower FX spreads and a wider range of hedging products are some of the benefits and opportunities that are presented to importers of Chinese products when settling RMB.
The People’s Bank of China has also been cautious in opening its currency to market forces; its most recent plan is to establish a Cross-Border Interbank Payment System (CIPS) in the next couple of years. This will enable banks outside of China to settle RMB international payments.
However, there remain challenges for companies to switch to settling in RMB. These include readiness of a company’s internal systems and infrastructure, people and its ability to mitigate risk. Rapidly evolving regulations and localised implementation in the different Chinese provinces pose difficulties for companies wishing to adopt the currency.
International Banks with a strong footprint across the Middle East and Africa play a key role in embedding and amplifying this rapid transformation. Investing in RMB road shows, facilitating cross border trade settlement, developing RMB denominated transactional and investment products and having strong regulatory relationships in both China and the target markets man that international banks can help both the buyer and the supplier.
The RMB still has a long way to go before it competes head to head with the euro and the dollar; however, it is on the rise and will come to play an increasingly important role in the operations of global companies. It is crucial that firms embrace the RMB, the cost efficiencies that can be achieved and the growth opportunities that result from its use.
Nowadays, the question is no longer ‘whether or not’ this currency will become a true alternative reserve currency to the US dollar and the euro; it is now a question of ‘when’?