Chinese Currency Presents Growth Opportunity, but Canadian Companies Hesitate


With expected weakening of the RMB against the CAD dollar in 2015, contracts settled in RMB will be more attractive to Chinese buyers than those denominated in either Canadian or U.S. currency.

The Chinese renminbi (RMB) has only been accessible outside China for only a few years, but it has already become the fifth-most-popular trading currency in the world. With the hope for the RMB to become a global reserve currency alongside the U.S. dollar over time, the Chinese government has been carefully managing the global rollout or “liberalization” of the RMB. Late last year, China signaled its support for more trade with Canada by signing a currency swap agreement and authorizing the first RMB trading hub in North America. The clearing centre officially opened in March 2015.

The trading hub enables the direct exchange of the Canadian dollar with the RMB in real time, allowing the trade to be completed in Canadian time zones and eliminating the step of converting to another currency first. Through a related agreement, China has also issued a quota for institutional investors to trade in RMB-denominated stocks and bonds issued onshore in China and through the Hong Kong Stock Connect.

Globally, the most common use of the RMB is for import/export activities. The Canadian Government, trade organizations, and banking industry worked hard to have the RMB trading hub located in Canada in an effort to fuel more trade and investment flows between Canada and China at a time when Canada's economic growth has stalled and domestic expansion and investment possibilities are limited.

China is already Canada's second-largest trading partner after the United States, as well as its fastest-growing, but the balance of trade has shifted decidedly in China's favor since 2001. In 2013, China's imports from Canada totaled US$25.2 billion, while Canada's imports from China were more than double that amount at US$51.2 billion.1

Because of the magnitude of Canada's trade with China, though, only a small increase in the export growth rate would result in a significant windfall. According to an October 2014 Canadian Chamber of Commerce report, the direct benefits of the RMB trading hub over the coming decade would be an additional CA$21 billion to CA$32 billion of exports, along with potential discounts on imports totaling CA$2.8 billion.

 

Unrealized potential

In the year leading up to the opening of Canada's RMB trading hub, use of RMB for trade settlement slipped globally, as did Canada's use of the currency. In an annual global survey commissioned by HSBC, the percentage of companies worldwide using RMB for trade settlement worldwide dipped from 19% to 17%. Only 3% of Canadian businesses reported to HSBC that they had conducted cross-border transactions in RMB in the previous 12 months, versus 5% a year earlier. The drop in RMB use was even steeper across the border, with 10% of U.S. companies completing transactions in RMB in HSBC's 2015 survey, versus 17% the prior year.

While 62% of Canadian businesses reported in HSBC's recent RMB Internationalisation Study that they anticipated greater trade with China in the coming 12 months, that confidence level had fallen from 74% a year earlier.

Why have Canadian businesses been slow to adopt RMB?

Historically, use of the RMB outside of China and for trade has been complex, but with the increased widespread use of the currency globally, it is becoming easier. In addition, international banks like  the HSBC Group have been gearing themselves up to facilitate the use of RMB by their global clients through new products and services. With the introduction of the RMB hub in Canada local banks are now expanding their offerings.

HSBC asked respondents to its RMB Internationalization Study2015, “In what ways could a bank better support you in capturing opportunities to use RMB as a cross-border settlement currency?” Among Canadians, the top answer, given by 58%, was seminars on products, overseas markets, and opportunities, followed by access to informational materials, at 47%.

A key factor driving RMB adoption has been the Chinese government. Chinese authorities have been relaxing cumbersome rules and providing more stability through the introduction of global currency swap agreements like the one signed with Canada in late 2014.

At this point, one of the main barriers is outdated perceptions among Canadian companies that have not kept up to date with these initiatives.

 

RMB's practical benefits

The adoption of the RMB in Canada is expected to be a gradual one, with a three- to five-year time horizon likely for most companies, but as more Canada-China trade is carried out in RMB, Canadian companies will realize savings and gain a competitive advantage.

The immediate benefit for Canadians using RMB is a potential reduction in total exchange risk on the deal compared to using U.S. dollars, because the fluctuations of the U.S. dollar against the RMB and the Canadian dollar are removed from the equation. The Canadian Chamber of Commerce has estimated that being able to directly convert Canadian dollars to RMB could save Canadian businesses $6.2 billion over 10 years.

When conducting business in China, Canadian companies can also improve their negotiating power to obtain discounted prices by asking for invoicing in RMB. The HSBC survey showed that 55% of Chinese companies were prepared to provide a price advantage if the transaction was settled in RMB, with 17 percent of businesses offering an advantage of more than 3%.

In addition, Canadian companies may also have a much wider selection of Chinese companies with which they can partner, because the majority of small and mid-sized companies in China are not equipped to trade in any currency other than RMB, which is known as the Yuan within the country.

With expected weakening of the RMB against the CAD dollar in 2015, contracts settled in RMB will be more attractive to Chinese buyers than those denominated in either Canadian or U.S. currency.

The final benefit of using the RMB with Chinese partners is less quantifiable, but perhaps more valuable—enhancement of the relationship between Canadian and Chinese businesses. Globally, the number one reason companies not currently using RMB intend to use it in the future is because it was requested by their trading partners, according to HSBC research.

 

 

Source:  HSBC RMB Internationalisation Study 2015

 

 

Remark:

  1. Source: Industry Canada’s Trade Data Online database

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