The use of Renminbi for trades and payments is growing fast, but there are major barriers to growth. Now SWIFT has published a best practise guide to help spur the internationalisation of the renminbi. Duygu Tavan reports

SWIFT says that China is the biggest international payments corridor, but the renminbi (RMB) is “underutilised at the international level.” SWIFT ranks the RMB in number 21 in world payments currencies – its share in payments value was just 0.24% in 2010, a stark contrast to China’s share in world trade, which stood at 11.4%.

In 2011, the growth of the RMB far outpaced that of the other BRIC countries. The value of RMB payments grew by 14.8%. That compares with Russia’s 7.4% growth, India’s 4.1% and Brazil’s 2% growth, according to SWIFT data.

As the Chinese currency’s use in trades outside of China continues to grow, it is fundamental to have clear market practice guidelines to support institutions in straight-through rates and supply appropriate invoicing strategies and technology. And in mid-February, SWIFT published its Best Practice Guide for RMB [CNY] offshore payments. SWIFT’s community banks have set the guidelines for efficient offshore RMB transaction processing.

The Chinese currency has two codes, CNY for onshore and CNH for offshore. “We have come up with guidelines on how to differentiate between onshore and offshore settlements,” says Lisa O’ Connor, SWIFT’s director of RMB Internationalisation.

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“The offshore market has a different rate than the onshore market, and corporates need to differentiate between them. If you deal in CNH, it is not an official ISO currency code, so you have to send your deal ticket to your middle office, which will fill a confirmation of that deal and normally, this happens electronically. Before the confirmation is sent outside the organisation, they have to flip the currency from CNH to CNY,” O’Connor explains.

Once the trading activity is done, every other settlement afterwards is done in CNY.

SWIFT looks at RMB internationalisation through three groups – cash and trade; investor/securities; and FX money market and derivatives. SWIFT acts as a facilitator and co-coordinator, organising meetings of parties interested in each area.

“RMB payments in trading are being taken up by multinational corporates, but there is a lot of work to be done around creating awareness around the benefits of RMB payments. Our February 2012 Tracker measured the trade with China and Hong Kong using our messages. For import, only about 1.7% is done in RMB and for exports it is only 2.5%. That is versus around 80% of the US dollar for both imports and exports.”

FX benefits

RMB offshore trades are still settled in Hong Kong, but London is emerging as a Western settlement hub, which would of course make trades with China more accessible, and therefore easier.

Establishing London as a clearing and settlement hub for the Chinese currency could result in cheaper foreign exchange for companies operating from the UK and rest of Europe. European corporates that already have strong business ties to and with China could simply use the RMB on its invoices.

Such measures could drive European corporates that have developed a strong trade link with China to now consider invoicing trades in RMB, for which they would have to use the foreign exchange market. They could negotiate discounts on invoices.

“That is the really exciting thing about it. Favourable terms can be negotiated by companies willing to use the RMB. But for corporates to do this, it is not necessary to clear the payment in London,” says Duncan Levesley, senior manager, research and advisory, at the China-Britain Business Council.

Levesley says that what is more important is the willingness and use of the RMB among corporates.

“Not many British companies have used it so far. There is still uncertainty about what RMB payments mean in practise. But more and more companies are testing the water. At the moment, this is done by the larger corporations. SMEs are a bit reserved still and will follow later. Most of the UK biggest firms have looked at RMB trades and quite a few have started doing test trades,” Levesly adds. “Most of the major banks offer RMB accounts.”

Likewise, Chinese corporates and SMEs could avoid FX costs and exchange risks by invoicing in RMB – reducing their bottom-line costs.

“Corporate treasurers want to match their assets to their liabilities. If these don’t match, the cost of hedging that risk can be expensive, regardless of the currency. Chinese corporates and SMEs have, for years, been exposed to the US dollar and the euro etc – they never had the option to match their assets to their liabilities. So if Chinese corporations can now use their own currency, they won’t have so much costs to match those assets to their liabilities,” says O’Connor.

The UK already accounts for 30% of all RMB foreign exchange trading and counts “tens of billions in RMB deposits” on its shores, the UK’s HM Treasury says. Only a limited number of UK corporates actually hold RMB deposits and the Chinese currency’s liquidity in London is still low. But according to the Treasury, London “now accounts for over 40% of global offshore RMB currency trading and 30% of RMB payments”.

This status has been achieved since September 2011, when the Chinese chancellor and vice premier Wang Qishan voiced China’s agreement in developing a hub for RMB-denominated products and services in London at the UK-China Economic and Financial Dialogue (EFD).

According to the Treasury, RMB trades and settlements receive high interest from British banks and financial service institutions as they consider the foreign exchange and bond issuance market as lucrative. Barclays Wealth, DBS, HSBC Private Bank and OCBC already offer such service.

But London has not reached the offshore RMB clearing and settlement centre status that Hong Kong holds, and there are a few significant barriers to this, not least the inconvenient overlap between the trading times of London and Hong Kong  and the lack of liquidity in the currency in Europe.

London is already a major FX centre anyway, so it is logical to add RMB payments to London as well. “London is already a clear leader in the FX space and could help the internationalisation of the RMB,” says O’Connor.

But in the FX market, the RMB is “underrepresented” in comparison to China’s economy. Its market share in FX value was 0.9% in June 2011 and world GDP share was 9.5% in 2010. This equates to a FX/GDP co-efficient of 9%. According to SWIFT, this is “very low”: The Thai baht co-efficient ratio is 46%, even though its FX market share is was 0.2% in June 2011 and world GDP share was 9.5% in 2010.

Comparison to the yen

SWIFT says that a currency is considered international once it is widely used as a unit of account, a medium of exchange or store of value. The RMB has not reached that status yet– but when will it?

“That is the trillion dollar question,” admits O’Connor. “In the 1980s, the Japanese government decided to internationalise the use of the yen. This process obviously had a lot of favourable outcome: it integrated Japan with the rest of the world financially, it lowered regulatory barriers in the free flow of capital – all the things we hope will happen in China. But now we look at the yen and we see that trade in yen is still accepted, but for payment purposes, such as reserve currency, it is not used as widely as the dollar or euro.”

In fact, the use of the yen for payments is about as high as the Australian or the Canadian dollar and about a third of the size of the British pound.

“The question everybody is asking now is will the internationalisation of the RMB be faster than what Japan has achieved in several decades? I believe there are signals going towards it being faster. This time around, the financial landscape is different. There is a lot of regional co-operation and will to develop the use of the RMB. The yen never really realised its full potential in this area, there was not so much regional involvement. But this time, with the RMB, there is. Even outside of Asia, the use of RMB is increasing in areas like the UK for both payments and FX, some use of it is in the Americas, Africa and Middle East. At the moment, the main centres are Hong Kong and mainland China, followed by the UK and Singapore.”

In the short term, O’Connor believes that the RMB will be used for trade. There are some parallel developments of RMB-denominated products for investment purposes. 

Last summer, HSBC CEO Stuart Gulliver told the British American Business Conference in London that the Chinese currency would become one of the main reserve currencies worldwide in the next 15 to 20 years. He argued that while the RMB may not replace the dollar, its power could equal that of the euro – if the euro overcomes its own difficulties.

Background

Back in 2004, the Chinese government commenced a gradual liberalisation of the renminbi (RMB). Since then, total Chinese trade settled in RMB has increased from 0.7% in the first half of 2010 to over 9% in the first half of 2011.

In Hong Kong, the offshore hub for payments and settlement made in the Chinese currency, RMB deposits in have soared from 64bn in January 2010 to 627bn by November 2011, while the volume of RMB-denominated bonds shot up from zero to USD31.5bn in just four years. Now there are ties between the UK and Chinese governments to establish London as a Western offshore trading hub.

“China’s central bank has been working hard to internationalise its currency for a couple of years, implementing pilot schemes to develop RMB markets, signing currency swap agreements with other countries, as well as negotiating overseas loans denominated in RMB,” according to China.org, a website that is authorised by the government and backed by of the State Council Information Office and the China International Publishing Group (CIPG) in Beijing.

This push to liberise and internationalise the Chinese currency seems to pay off: In mid-January, the HM Treasury in the UK officially put its weight behind making London a RMB offshore market when George Osborne, chancellor of the exchequer, met up with Norman Chan, CEO of the Hong Kong Monetary Authority (HKMA), to discuss future collaboration on RMB as a trading currency worldwide.

Together, the two institutions launched the private-sector London-Hong Kong Forum, to explore the technological requirements to establish London as an offshore RMB-clearing hub. The Forum will also look to develop the required systems. It will analyse synergies between the UK and Hong Kong clearing and settlement markets, as well as market liquidity and the development of new RMB-denominated products. Current representatives of the forum include HSBC, Standard Chartered, Bank of China, Deutsche Bank and Barclays. The forum will meet twice a year.

More specific information has not been officially announced yet, but the HKMA is going to extend its working hours by five so it overlaps with European market trading hours, and so that RMB transactions in London can be settled faster, from June on.

All this is a continuation of an official agreement between the UK and Chinese governments made at the 2011 Economic and Financial Dialogue. At that conference, the chancellor and Chinese vice-premier Wang Qishan agreed to develop an offshore RMB market in London, which would be complementary to Hong Kong – the principal RMB offshore centre.

This agreement recognises Hong Kong as the world’s largest offshore centre for RMB clearing and settlement. To become its Western equivalent, London has to use Hong Kong as a “gateway into the ‘onshore’ RMB market”, the HM Treasury says.