The People’s Bank of China (PBoC) expanded the renminbi-denominated cross-border trade settlement scheme last Friday (March 2), in a move to promote the use of the Chinese currency in foreign trade and its growth as a global currency. But HSBC believes that overseas companies still need to be educated and convinced to use the renminbi in trade settlements.
“This is a very positive development on the internationalisation of the renminbi. At the very least, it helps to remove another internal hurdle,” said Thomas Poon, Hong Kong-based head of business planning and strategy at HSBC to Asiamoney PLUS in a telephone interview on March 8. “But obviously it is not a panacea to create all of a sudden a dramatic increase in cross-border trade settlement volume in renminbi because it boils down to several factors.”
HSBC says it is actively on roadshows to educate companies around the globe about the economic benefits of settling trade in Chinese currency. But the bank also believes that local mainland companies can help speed up the ‘raising awareness’ process.
“For companies further away from Asia, this is still something very new to them,” said Poon. “Some of them might not have too many details about what this particular programme is about and likely, they have not been asked by their Chinese counterparts to get a quote in renminbi.”
“The fact that for individual companies, when they negotiate a contract with buyers or suppliers, they should at least get a quote in renminbi other than US dollars and see whether it is more competitive or more economic for them to settle in renminbi,” he said.
US companies that import from China are being charged an average 3% extra for continuing to settle their bills in US dollars instead of renminbi, translating to US$2.4 billion in unnecessary foreign exchange fees every year, said Western Union Business Solutions in a report.
HSBC also notes that in some markets, products or services denominated in the Chinese currency – which includes being able to provide CNH quotes against G10 countries’ and nine other Asian currencies “around the clock” – are either not available or is in the process of being developed, which hinders renminbi-denominated trade settlement growth.
The new rules will allow all enterprises with import and export license to settle their foreign trade in renminbi. For the past two and a half years, only businesses on the mainland designated enterprises (MDEs) list were permitted to conduct trade in the currency.
The move is designed to "meet market demand and make foreign trade freer and more convenient", the central bank said in a statement posted on its website.
Renminbi-denominated trade settlement surged after it was first launched in July 2009. In 2011, around 9% or Rmb2 trillion of China’s global trades with the rest of the world – Hong Kong included – were transacted in the Chinese currency, according to data from the central bank.
HSBC predicts trade conducted in renminbi will surge six-fold to US$2 trillion by 2015, representing a third to half of the nation’s trade volume.