There are benefits and challenges for NZ firms settling Chinese trades in RMB, writes Ellen Read
The Peoples' Bank of China (PBOC) is "moving along at a huge rate" to internationalise the Chinese currency (the renminbi or RMB). This means Kiwi importers and exporters must get on board or risk losing valuable customers and markets, says Cath Henry, HSBC NZ's head of global payments and cash management.
Twelve months ago, she said, discussions the bank had with customers around swapping from US dollars to settling Chinese trades in RMB were "probably aspirational", now these conversations are "actually being had" with Chinese counterparties and this will only increase.
"The big buyers out of China are government-owned entities and therefore, when the Government moves to really internationalise the currency they will mandate that their own subsidiaries only accept RMB.
"That will be an incentive [to settle in RMB] in the way that only a structured environment like China can provide," Henry said. "Don't underestimate how determined the PBOC are to make this happen" she said, adding that HSBC is aware of conversations involving global commodity exporters to "gauge comfort levels" with swapping to RMB settlement.
The benefits for New Zealand firms as RMB settlement becomes easier include the ability to negotiate better terms with Chinese partners (up to 7 per cent may be built into quotes as a currency hedge), potentially widening the customer pool, and reducing fx hedge risks associated with having to convert back and forth into the US dollars traditionally used for trade with China.
The challenges are understanding how the RMB settlement procedure works, making sure the paperwork is correct, and taking a leap into the unknown to become part of a fast-moving and changeable area.
The RMB Cross-Border Trade Settlement Pilot Scheme, which opened up the previously highly-controlled RMB to offshore settlements, began in July 2009 and has expanded faster than expected ever since. Now, any overseas entity can settle trade invoices in RMB, as can any Chinese entity except those on a soon-to-be-published blacklist.
Since the first New Zealand settlements in RMB were completed in the second half of 2010, banks and businesses have gone quiet on how many trades have been completed.
This is likely due to a combination of inertia in changing from current US dollar settlements and the need for more confidence in, and understanding of, the Chinese currency. ANZ, BNZ and HSBC can all settle RMB trades and, last June, Fonterra became the first New Zealand corporate to issue debt denominated in Chinese renminbi when it sought to raise 300 million Chinese Yuan bonds.
Gary Cross, Head of Trade & Supply Chain, HSBC New Zealand is expecting incremental growth off the current small base. He suggests Kiwi exporters and importers start by getting and giving dual quotes to find the potential savings.
Getting proper advice, from banks and other professional service firms, is essential, he says, given how different payment infrastructure in China is to New Zealand's, as is ensuring companies and bank accounts are set up properly to trade in RMB.
The numbers backing the reasons for doing so are compelling: HSBC economists say, after the US dollar and euro, the RMB is set to replace pound sterling as the third most popular currency for trade settlement globally. A survey done by the bank also found nearly eight in 10 businesses in mainland China which have not yet started to use RMB to settle cross-border trade are planning to use in some capacity in future transactions.
And, to complete the trifecta, the bank says more than US$2 trillion, or one half, of China's total trade flows with emerging markets is expected to be settled in RMB by 2013-15.
If that isn't convincing enough, the Government's China Strategy suggests a doubling of two-way goods trade with China to $20 billion by 2015 and several government initiatives have been put in place to prepare for this and assist increasing RMB settlement.
In April 2011, the Reserve Bank of New Zealand and People's Bank of China (PBOC) established a RMB 25 billion (NZ$5 billion) reciprocal currency arrangement to support trade settlement in RMB. The swap line lets the RBNZ borrow RMB if financial market disruption makes it difficult for businesses to access RMB to settle transactions with Chinese businesses.
And in November, ahead of its highly public China Strategy launch, the Government came on board with approval for New Zealand Export Credit Office trade guarantees (which assist trade by providing a guarantee to exporters or banks against defaults on contracts) to be underwritten in RMB.
Trade Minister Tim Groser said then the changes reflected the shifting nature of New Zealand's export trade where "New Zealand exporters are increasingly under demand from their buyers to trade in the buyer's local currency".
Rise of the Redback
China will promote its cross-border RMB business steadily.
* 181 foreign countries have actual RMB receipt and payment cross-border business in China.
* In 2011, RMB settlement of offshore direct investment was more than RMB 20 billion
* In 2011 foreign direct investment settlement totalled nearly RMB 91 billion
Source: People's Bank of China/China Daily
Finance Minister Nicola Willis is seeking advice from Inland Revenue.