Australian-based commodity companies could increase their adoption of the renminbi in the next few years, but only if US dollar-denominated commodities are quoted in the Chinese currency.
Mining giants, such as Fortescue and Rio Tinto, have been late-adopters of the renminbi when it comes to trade settlement.
This is perhaps understandable. Given the fact that commodity exporters generally have US dollar-denominated balance sheets, and that the commodities cash and future markets are priced in US dollars, trading in renminbi will expose these enterprises to additional foreign exchange (FX) risk that they do not have today.
“Although we purchase almost US$2 billion in goods from China each year, our expenditure there still falls well short of our sales revenue,” said a chief China adviser for an Australian-based mining company to Asiamoney PLUS in an email reply to questions. “If we denominate those sales in renminbi we would therefore end up with substantial reserves of a currency that is not fully convertible. This would make life difficult given that most of our costs are in US dollar and Aussie dollars.”
But as China, the world’s biggest commodity consumer, continues to promote global use of the renminbi, it is possible that natural resources are eventually priced in the currency. This could accelerate the renminbi take-up rate by Australian corporates, note market participants.
“People are starting to take a view of the renminbi as a reserve currency and not only a trade currency. It is then only logical to assume that commodities could also be denominated in the renminbi,” said James Hogan, head of commercial banking at HSBC Australia to Asiamoney PLUS in a telephone interview on January 23. “Certainly the big iron ore exporters out of Australia are already looking at the feasibility of invoicing in the renminbi even though iron ore internationally is traded in US dollars.”
Despite this positive outlook, Australia only accounts for about 1% of total world trade settled in renminbi at the moment, highlights HSBC. This is considered miniscule considering the fact that China is Australia’s largest trading partner with 25% of bilateral trade flowing between both economies, whilst Australia is China’s fifth biggest.
Nonetheless, HSBC believes that by 2015, half of the Chinese trade will be settled in renminbi versus the current 9%-10% and Australia will account for a fair share of the pie.
“We feel strongly that this take-up rate will increase and a lot of corporates that we speak to feel that this will change as Chinese economic growth becomes increasingly driven by domestic consumption, rather than exports,” said Hogan. “Australian companies that have fixed costs and operations within China Australian companies that have fixed costs and operations within China will of course be a driving force to more transactions being done in renminbi.”
However, the types of companies that do not have large fixed costs in China are typically the commodity players as their supplies are primarily sourced from operations in Australia, Africa and the Americas which accounts for their slow take up of renminbi. These businesses then export these products into the Chinese market.
While the adoption of the renminbi for trade purposes by miners might be lagging behind other industries like the retail sector, market participants believe that these businesses will gradually move to adopting the currency as it gradually becomes more easily convertible and as these players source more commodities from China.
“We do have explorations underway in mainland China,” said the chief China adviser. “It is certainly something we will continue to watch with interest as the renminbi becomes more freely convertible over time.”
Melbourne-based Steve Kelly, head of renminbi sales and product for global markets at ANZ agrees: “The competitive landscape for these large institutions is US dollar-based therefore it will be a significant change to the market dynamics if one or more of these enterprises and just as important their Chinese customers and state-owned enterprises, switch and adopt the renminbi.”
According to Swift data, renminbi payments by Australian corporates excluding China and Hong Kong have shot up since August 2012 after a period of relatively low volumes, propelling the country from 12th in November 2010 to fourth place in November 2012.
Additionally, the redenomination of trade into the Chinese currency by Australian corporates gained momentum in the last few months after Wayne Swan, Australia’s treasurer, said on July 11 in Beijing that he would like the Australian dollar to become the third currency directly tradable with the renminbi, after the US dollar and the Japanese yen.
“If the renminbi and Australian dollar can be directly traded in both countries, we see the renminbi’s role in bilateral trade will only accelerate,” said Kelly. “As China’s capital control becomes more open, the renminbi will become an important funding currency for investment into Australia, including into the mining sector.”
ANZ predicts that the Australian dollar is the next most promising currency to form direct ties with the Chinese renminbi. Globally the Aussie dollar is the fifth mostly traded currency and the AUD/USD is the fourth most liquid pair.