By Peter G. Hall
On Monday March 23rd, grumpy spring break returnees had something to smile about: the renminbi (RMB) will step into Canada with the inauguration of the only RMB hub in the Americas, one more advance on its long march to internationalization. It all began with its first step into Hong Kong more than a decade ago. A long pause, and then a move into Southeast Asia in 2013. Then Europe in 2014. In each of these locations, the RMB’s arrival was both eagerly anticipated and ballyhooed. We know in Canada it will be greeted with fanfare, but what is less certain is whether or not Canadian exporters and international investors will take action once the celebration ends. Should they?
It sure seems so. Consider the marvel of the RMB’s rise. Simply put, we are watching history in the making. Within the span of the last five years, the RMB went from being virtually non-existent outside the People’s Republic to the fifth most used payments currency in the world as of last autumn. And there is little doubt that before long it will overtake the Japanese yen and be fast on the heels of the pound.
By comparison, the only globally significant currencies to internationalize in the last half-century were the euro and the yen. And neither one is indicative of the RMB’s future prospects. In the Euro’s case, the currencies that merged together were already hard currencies. As for the yen, it internationalized under very different circumstances– we know that Tokyo’s global aspirations for the yen, and the rest of the world’s appetite for it, were measured from the outset.
In contrast, Beijing has made it clear that it intends to transform the RMB into a global reserve currency. Moreover, China has arrived as an economic superpower and established robust trading relationships with every corner of the globe. Most will not be surprised, for instance, to hear that China is Asia’s largest trading partner. Fewer realize that China overtook Europe as Africa’s largest trading partner and less still are aware that China is set to overtake Europe as Latin America’s second largest partner as early as 2016. It may or may not be well known, but here in Canada, China stands quite alone as our second largest trading partner. In other words, the demand structure for RMB internationalization is global in scope, deeper than that of the yen, and alive and growing here in Canada.
With these realities in mind, Canadian companies would do well to take notice, consider ways of leveraging the opportunities the RMB’s arrival presents to them, and take appropriate measures to mitigate the risks. Regarding risks, the story is clear. The establishment of RMB trading hubs across Asia and Europe is spurring our competitors in Australia, the UK, Germany, and South Korea, to name just a few, to experiment with RMB-denominated trade solutions. If Canadian companies are not willing to step out in the same way, they may find themselves having trouble gaining or maintaining their market share in China in the near- to mid-term.
On the opportunities front, the benefits are equally apparent. By adopting the RMB as a payments currency, Canadian traders will have access to a wider universe of Chinese clients, and at the same time, improve their bottom lines. This is because the vast majority of China’s traders are SMEs, most of which do not have USD liquidity. As such, they need to rely on foreign exchange agents to access dollars, who in turn charge service fees and impose conversion ceilings. At the end of the day, this system creates bottlenecks and costs, not to mention manifold frustration. However, if payment was made in RMB, life would become a whole lot easier and cheaper for everyone involved – except, of course, the foreign exchange agent.
Finally, timing is also important, especially for our exporters. The RMB is expected to continue its fall against the US dollar during 2015. China’s importers will be more receptive than ever to denomination of contracts in RMB.
The bottom line? The RMB’s long march to internationalization is rewriting the rules of engagement and, in the process, creating new risks and opportunities for the global trading community. When the celebration of our new hub dies down, it’ll be time for Canadians to roll up our sleeves and make the most of it.