The Role of Trade Finance in Working CapitalRMB: the road to
internationalisation
In the next five years China is set to overtake the USA as the world’s largest
economy, yet at present less than 1% of world trade is settled in RMB (Swift
2012). This is a situation that the People’s Republic of China (PRC) has been
working hard to change by introducing a series of internationalisation measures
to offer businesses outside China the opportunity to settle trade, invest and
raise funds in RMB.
The RMB is unusual in that the PRC is
seeking to internationalise it without it
being fully convertible. This route has been
chosen in order to avoid the exchange
rate shock and ‘hot’ money flows that
could result from full currency and capital
liberalisation. Instead, the Chinese
solution has been a gradual, co-ordinated
internationalisation programme designed
to allow capital flows and convertibility
only through clearly defined, controllable
channels. At the heart of this solution is the
distinction between RMB traded onshore
(in mainland China), which is referred to
as CNY, and RMB that is traded offshore
(mainly in Hong Kong), referred to as
CNH. So, while the RMB remains a single
currency, it trades in two different forms, at
two differing exchange rates, depending on
where it is traded.
A dual approach
China has deployed a two-pronged strategy,
encouraging the use of the RMB to settle
trade, while at the same time experimenting
with the use of an offshore market in Hong
Kong that allowed non-residents to hold
RMB in their portfolio. This seeks to address
at least two of the three requirements of an
international currency: that it is used globally
as a unit of account, invoicing and medium
of exchange for cross-border trades; and
that it establishes itself as an investment
currency worth holding for non-trade uses.
The third and final requirement, that it is
an international reserve currency, should
then follow in time. Indeed, several Asian
countries are reported to be holding RMB
reserves already.
So, to expedite this plan, in June 2009
an RMB cross-border trade settlement
scheme was launched, linking five
mainland cities with Hong Kong, Macau
and the ASEAN countries. This was rapidly
expanded until, in March 2012, RMB
trade settlement extended to all Chinese
companies with import/export scope and
the whole of the rest of the world. As a
result, we have seen spectacular growth
in the use of the RMB. In the first quarter
of 2012 alone, China’s RMB-denominated
trade amounted to over RMB 500 billion,
considerably higher than the figure for
the whole of 2010. Yet there is still further
potential for growth. While in Q1 2012,
10.5% of mainland China’s trade was
settled in RMB, this was way behind the
percentage of trade settled in the local
currency in other major economies: Japan
32%; EU 50–60%; and USA 80–90%.The RMB opportunity
As a result of this growing trend, Chinese
companies are increasingly asking for
trade business to be conducted in RMB.
The advantage is that they no longer have
to face the difficulty of sourcing the EU
or USD funds to pay regional or global
customers, nor do they need to take or
hedge the risk in holding such currencies.
Foreign firms ready to do business on this
basis with Chinese companies can benefit
too, because trading in RMB may help
them to negotiate favourable terms with