The importance of invoicing a transaction in the renminbi could be the key to boosting the Chinese currency’s presence in the global trade arena. But market participants highlight that several obstacles still exist in the market which dampens this development.
In order for the renminbi to reach the ranking of an ‘international’ currency, the role of the invoicing currency is more fundamental than that of the settlement currency, according to a report released by the Asian Development Bank Institute (ADBI).
If exporters’ most important consideration is to avoid exchange rate risks, they would prefer to use their own national currency to invoice trade, argues Yongding Yu author of the report. As long as exporters can convert the settlement currency into their own national currency, it does not matter that much what currency is used for trade settlement.
However, the adoption of the renminbi as a trade invoicing currency has been slow.
In order to boost the usage of the Chinese currency in trade transactions – whether in terms of invoicing or settlement – having enough liquidity globally is crucial.
“The question really is how deep is the renminbi market today to really accommodate full the conversion of the US dollars into renminbi from an invoicing perspective,” said John Kong, head of trade services and cash management at United Overseas Bank (UOB) to Asiamoney PLUS in a telephone interview on July 13. “From a capital market perspective, there is a need for the market to develop and this takes a lot of time.”
“Transparency in foreign exchange, funding and pricing is also key because that will give certainty to importers and exporters,” he added.
While the payments of the Chinese currency grew 8.6% globally in March, the current market share of the renminbi is still very small, standing at 0.4% in May according to data provided by Swift. In the first quarter of the year, Asia Pacific transacted 7.2% of total trade payments in renminbi with China and Hong Kong. Europe comes in second at 6.7%.
The lack of renminbi investment products available onshore and offshore also deters corporates from essentially using the currency in both trade invoicing and settlement.
“If they invoice in renminbi and they get the CNH into Hong Kong, they need to understand what to do with it,” said Mahesh Kini, regional head of cash management for corporates Asia Pacific at Deutsche Bank to Asiamoney PLUS. “Their options will depend on the depth in the market to place this CNH in investment options, and the amount of liquidity available to convert the CNH into other currencies in international markets.”
As long as the renminbi is used for trade settlement and the currency has flown out of the country, the designers of the road map do not seem to worry whether the renminbi is used as the invoicing or settlement currency. What transaction banking experts want to highlight is that corporates now have the invoicing option available to them now, which was not available to them before.
“At the end of the day, it’s up to our clients,” said Michael Vrontamitis, regional head of product management for transaction banking Northeast Asia at Standard Chartered (Stanchart) to Asiamoney PLUS. “A lot of it is around understanding the pros and the opportunities available, and that depends on which side of the transaction you are on.”
UOB’s Kong agreed: “At this stage, it is a dollars and cents question. There has to be an incentive for people to move away from the comfort zone and what they are familiar with. If you have always been doing your trade settlements in the US dollars and are sure about your processes and liquidity, then you won't want to change unless there are benefits in doing so.”
“If there is an opportunity for you to leverage and get a better deal, then there's more willingness for people to go that extra mile to try to redenominate their trade settlement currency to renminbi,” Kong added.
Despite all these concerns, experts believe that the renminbi will continue to flourish amid China’s ongoing but gradual deregulation process.
And as previously reported by Asiamoney PLUS, the establishment of an offshore renminbi clearing bank in Singapore will boost liquidity and improve the efficiency of the currency’s clearing and settlement process in the future.
Transaction banking experts are confident that the internationalisation of the renminbi is headed in the right direction. Many have used Japan and its currency liberalisation story in the 1980s as an example, which accurately mirrors China’s efforts to make its currency fully convertible in the next few years.
“Japan went through the big bang in the late 80s and given how its currency is now used for international settlement and trade shows that it is possible for China,” said StanChart’s Vrontamitis. “The true test of whether the renminbi will progress depends on what percentage of transactions happens offshore – outside of China and Hong Kong.”
Active accounts that are conducting renminbi increased by over 40% in the first half of the year, says StanChart. The bank also predicts that 20% of global trade will be redenominated in the Chinese currency by 2015, doubling up from the current level of 10%.
The foreign investor corporates (FIC) – multinational entities operating onshore which accounts for about 53% of China’s trade, approximately US$1.8 trillion – has not switched to invoicing in a “big way” yet, adds StanChart.
“Once that reaches that tipping point and they start to switch, you will see an acceleration in redenomination,” said Vrontamitis.