Making the Most of the Renminbi Opportunity
by Angela Koll, Specialist Sales Strategy, International Business, Commerzbank
Moves towards liberalising the renminbi in China are good news for international companies looking to expand their trade business in the region, as well as for those who are contemplating entering the Chinese market. But making the most of these trade opportunities requires banking relationships that help corporates navigate the financial risks that remain prevalent in the region.
Renminbi (RMB) trade settlement volumes have grown exponentially since the launch of the pilot scheme in April 2009, which has since been expanded to allow enterprises in 20 Chinese mainland provinces and cities to settle their trade in RMB with trading partners globally. Certainly, the scheme’s growing momentum is highlighted by the dramatic increase in Chinese export enterprises registered to settle in RMB (known as Mainland Designated Enterprises) from 350 in 2009 to more than 70,000 today. And with the expansion of the RMB trade settlement scheme, the volume of RMB used for trade settlement has also increased tremendously – from RMB18.35bn (around €2.0bn) in March 2010 to RMB360.32bn (€39.5bn) 12 months later (on an accumulated basis).
The demand for settlement of trade transactions in RMB is expected to continue, reflecting the growing influence of China and the Chinese economy in global affairs, as well as the significant increase in intra-Asian trade. Additionally, as the currency gets liberalised gradually and adds liquidity to the market, and as the regulatory situation settles, growth in RMB payments, liquidity, trade, foreign exchange and the bond market should all follow. Clearly, if corporates want to keep or strengthen their market position in China, it is imperative that they are able to settle in RMB.
Many banks domiciled in Europe and the US have responded to this trend – opening RMB accounts for corporate customers in their home countries, and enabling them to undertake cross-border payments for trade related purposes and to handle documentary business in RMB. Indeed, Commerzbank, for example, expanded its RMB services in Germany in June this year – allowing German corporates to make or receive cross-border payments in RMB directly from customers in China for trade-related purposes.
But in a region that still relies on documentary letters of credit (LCs) as guarantees of trade payment, there are also hazards and complexities to trading in China. To navigate this risky landscape, corporates therefore need the help of banks with the technical expertise and experience of processing trade transactions in the region.
New opportunities for corporates to trade in RMB
Chinese companies are increasingly asking for business to be conducted in RMB. This is driven primarily by the issue of currency availability, with many local Chinese enterprises unable to source US dollars or euros. Smaller enterprises that were previously unable to trade in USD or EUR, therefore, can now access international markets by trading in RMB. Furthermore, settling in RMB is also beneficial to Chinese corporates as it allows them to transfer the currency risk to their foreign trading partner.