A mindset change among local companies in China is the crucial next step. Growth in Renminbi as an international trading currency has been rapid so far, with redenomination set to reach 15% of China’s trade by 2015. This will be driven by business fundamentals, as corporates switch to Renminbi in order to gain more control of their foreign exchange risk, save on cost and build their competitive advantage. However, a mindset change among local companies in China is the crucial next step if the Renminbi is going to reach the redenomination rate of 30% of China’s trade that many predict by 2020 – a doubling of today’s level. Raising awareness among these companies about the benefits of switching to Renminbi invoicing will be the big focus point for 2014. Chinese corporates need to examine the underlying input cost of their entire supply chain and ask themselves whether settling exclusively in USD remains the most efficient option. For a growing number, the answer is likely to be ‘No’. The projected rise in onshore sales, as Chinese domestic consumption grows, should be a factor in these considerations, and will likely help persuade more Chinese companies to make the move into Renminbi. With trade between China and the rest of Asia growing, and de-regulation continuing, the argument
ABOUT Michael Vrontamitis heads up Product Management East, Transaction Banking at Standard Chartered, covering our suite of Cash Management, Trade Finance, Securities Services and Clearing solutions for Wholesale Banking clients in Asia. Michael is also the chairperson of SWIFT Offshore CNY Best Practice Working Group – Cash & Trade Group. He joined Standard Chartered in 1995 and has worked in Hong Kong, London and Singapore across a number of businesses.
Growth in Renminbi as an international trading currency has been rapid so far, with redenomination set to reach 15% of China’s trade by 2015. This will be driven by business fundamentals, as corporates switch to Renminbi in order to gain more control of their foreign exchange risk, save on cost and build their competitive advantage. will build further for settling more trade in Renminbi as opposed to the USD. The Renminbi is likely to become the world’s fourth most used trading currency by 2020 but this won’t happen automatically. Sooner or later, local Chinese corporates will have to adapt their treasury management processes to make the most of the new reality. At the practical level, switching to settling in Renminbi should pose no difficulty for
these companies, as a full complement of global banking services now exists to help businesses manage the Renminbi as they would any other currency. What remains is a shift in thinking, away from the USD-denominated overseas trading that mainland Chinese corporates have been accustomed to since the early 1990s, and this is likely to take time. There is a role for both banks and Chinese regulators in educating these corporates, and encouraging them to consider the potential benefits of switching to Renminbi. We believe the Renminbi is likely to become the world’s fourth most used trading currency by 2020 – behind the USD, the Euro and the British Pound – but this won’t happen automatically. To reach its full potential as a global trading currency, the Renminbi will need to pass a series of tipping points. Further out, focus is likely to shift to the settlement of commodities trading, particularly oil trading, but this year attention needs to be firmly on Chinese mainland corporates. Their actions will be crucial in propelling the Renminbi into its next big phase of internationalisation. APRIL 2014
35