International Trade in RMB – Aspiration or Adoption?

As usage of Renminbi (RMB) for trade settlement gains traction, there is considerable interest amongst corporates and financial institutions about whether and when they should establish RMB capability to ensure their full participation in this growing trend within the international trade arena.

Growth in Demand for International Trade in RMB
There has been continued strong growth in RMB trade settlement, with cross-border trade in RMB growing by 41 percent from RMB 2.09 trillion (USD 336 billion) in 2011, to RMB 2.94 trillion (USD 474 billion) in 2012. RMB cross-border trade now accounts for more than 16 percent of China's total trade as of February 2013, according to CEIC Data.

When non-Chinese corporates consider using RMB, they are sometimes deterred by foreign exchange risks, convertibility issues and determining how they would deploy the RMB they receive. After further deliberation, however, many corporates have found that they simply cannot ignore the potential of the world's second largest economy, the benefits of its currency, and that they may actually lose business if they cannot respond to the preference of Chinese corporates that are key dominant players in their supply chain to transact in RMB.

With more corporates now looking at the ability to conduct trade in RMB, financial institutions see the importance of having RMB capabilities to meet their clients' needs and are thus developing capabilities to support clients directly, or through their correspondent bank. In Hong Kong, according to Hong Kong Interbank Clearing Limited (HKICL), the number of banks offering services in RMB has more than doubled from 65 in 2010, to 177 as of June 2013.

Benefits of Using RMB for Trade
Chinese corporates with operating costs in RMB gain clear advantages from using their home currency for trade, as settlement in RMB enables them to match revenue with expense, and reduces hedging costs.

Non-Chinese corporates have also found that conducting trade in RMB enables them to gain more business opportunities, improve pricing, and reduce currency conversion costs by keeping the funds they receive in RMB. For example, if a Singapore corporate and a Chinese corporate that are conducting business together agree to settle the trade in RMB, both can benefit from using RMB by sharing the savings where only one of the parties has to incur foreign exchange costs.

With the continued pace for RMB to achieve full convertibility, it will also benefit the international trade community with an alternative trade settlement currency to the current major currencies such as the U.S. dollars and Euro.

Capabilities for RMB Trade
Corporates that prefer to use RMB for trade are looking into setting up accounting structures, systems, treasury policies and procedures to accommodate RMB, and they are incorporating foreign exchange, tax and legal issues into these reviews as well.

Along with developing internal capabilities for RMB trade, global banks have started to provide advice on foreign exchange management, hedging strategies and investment options for holding RMB balances. Global banks are also advising corporates on solutions such as setting up a trading house, re-invoicing or Treasury Centers to support these RMB transactions.

Support for Growth of RMB Trade
Along with demand from corporates, Chinese regulators are pushing to increase trade in RMB. Whilst only Hong Kong and Macau were allowed to offer RMB trade settlement during the pilot scheme stage, regulators have since liberalized the current account and the RMB can now be used for trade in any market. Although the RMB is not yet fully convertible, pro-active steps have been taken by regulators towards that direction, promoting RMB as an alternative trading currency to the international trade community.

In May 2013, the State Council of China announced that it had developed a roadmap to open the capital account, which is important because liberalization of the capital account will allow RMB to be moved freely into and outside of China. Liquidity for RMB transactions in offshore markets will also be supported by the ongoing efforts of The People's Bank of China to establish bi-lateral currency swaps with Central Banks.

The changes in regulations have put in place the possibility of the RMB becoming an alternative to US dollars and the Euro for international trade. Whilst the US dollar is the dominant currency for trade in the United States and several parts of the world, and the Euro is dominant for trade with Europe, there is yet to be a similar dominant currency for trade in Asia. The RMB could possibly become that anchor currency. It is envisioned that in the foreseeable future, non-chinese counterparties without a foothold in China such as corporates conducting trade between Hong Kong and Singapore, or even Korea and Brazil, could use the RMB instead when trading internationally.

Support for International Trade in RMB
As financial institutions and corporates look at conducting trade in RMB, they need to ensure that they have support from their banking partner(s).

Financial institutions need to continue to support multiple currencies, since the RMB may remain just one of the many currencies that their corporate clients use for international trade. Corporates can benefit by selecting a global bank with a broad geographical coverage and full service capabilities, to support all the trading currencies they need. Financial institutions in offshore markets that do not have strong capabilities in RMB can benefit from collaborating with a global bank that offers full capabilities, as well as thought leadership, education and sharing of best practices.

Financial institutions and corporates alike can benefit from working with a global bank that has a RMB strategy, investments to support the strategy, access to regulatory and market updates, new trade products to support their needs, and the innovation to keep them at the forefront of their industry.

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Jacques Ling
Executive Director
Global Trade
J.P. Morgan Treasury Services
Email at jacques.el.ling@jpmorgan.com

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