24 October 2016
Companies with no renminbi strategy may fall behind their peers. Photo: Bloomberg
Companies with no renminbi strategy may fall behind their peers. Photo: Bloomberg

Why renminbi exchange rate is important to global firms

The inclusion of the renminbi in the International Monetary Fund’s (IMF) Special Drawing Rights currency basket is a decision made carefully and after a long deliberation.

It grants the Chinese currency a de facto reserve currency status.

It’s a big issue that central banks have to consider. The IMF is also obviously trying to remind corporates that they should taking into account the renminbi’s influence in their business in the future.

Reserve fund managers estimate that by 2025, about 10 percent of global foreign reserves will be in renminbi. Presently yuan reserves in countries outside China amount to US$7.8 trillion.

To achieve the 10 percent ratio, nearly US$800 billion more will have to be allotted for yuan-denominated assets.

The expected rising ratio of the renminbi in countries’ reserves is a reminder for companies to use the Chinese currency in settling their trades.

Meanwhile, as mainland investors have been diversifying their overseas asset allocations, outflow of Chinese capital is accelerating. By 2020, outflow from overseas investments made by firms and individuals will reach US$1.5 trillion.

The renminbi exchange rate band will inevitably be broader. The perception of a one-way uptrend for the currency will no longer exist.

Those with large business exposure in the mainland should keep an eye on this issue.

The things to consider are not only valuation but also liquidity: Companies have to make sure they have enough cash to repay debts.

Even corporates with weak links with China should also keep in mind that the country is now the world’s second-largest economy. It exerts a huge influence on the healthy development of emerging markets and commodity prices.

In the summer, the Chinese central bank made a one-time adjustment to increase the renminbi’s daily trading band, triggering sharp devaluation of the currency as market participants panicked amid concerns that China might start a global currency war.

However, the shock faded soon after the market realized it is just an essential move in China’s market-oriented currency reform.

Although there is no universal renminbi strategy for every company, those who neglect this issue will fall behind their peers.

Each company should come up with its own way of handling the adjustment to a renminbi currency regime.

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Risk Manager, Independent Model Validation at HSBC

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