Earlier this year, China revealed that its economy experienced the slowest annual growth rate in a quarter century, fuelling fears that the country could be heading for a sharp slowdown or hard landing.
Not surprisingly, related concern about the volatility of China’s stock market also grabbed major headlines.
However, what seems to have been forgotten is the opportunities that exist, particularly with regard to the renminbi.
There is an increasing opportunity for foreign companies and investors to potentially achieve competitive advantage by structuring more trade and investment in renminbi.
This, in turn, offers an opportunity for Chinese businesses and state owned enterprises (SOEs) that are being encouraged by the government to do more business in the Chinese unit in order to create a natural foreign exchange hedge (currency risk is actually being borne by other parties) against their main revenue currency.
Opportunities arise for foreign businesses as the renminbi devalues.
With markets believing that the renminbi depreciation will continue (it began in 2014), and even stronger evidence that the Chinese government is keen on lifting the status of the renminbi among global currencies through its inclusion in the International Monetary Fund’s SDR (special drawing rights) basket and encouraging more global trade in renminbi, there is an opportunity for foreign companies to structure more trade and invest in the currency.
According to SWIFT, the global provider of secure financial messaging, the renminbi is now the fifth most active currency for global payments by value and accounted for 2.45 percent of global payments in January 2016.
What has been overlooked so far is the benefits of trading in renminbi.
For large importers and often retailers, trading in renminbi is cheaper as it removes the foreign exchange margin from the contract and often Chinese companies will offer a discount of 1-2 percent if buyers pay in their country’s currency.
For overseas sellers, trading in renminbi gives them a better chance of penetrating the Chinese market.
An additional motivation is that if overseas sellers already have operations in China, they can use their renminbi export proceeds to cover their Chinese operating costs.
In terms of onshore businesses, we are seeing high levels of renminbi investment inquiries from SOEs that National Australia Bank does business with, particularly in the food and agribusiness sectors.
One key example of success where NAB has connected a core franchise customer to a business opportunity includes a2 Milk Co. Ltd (a2MC) – a listed New Zealand company that has operations in Australia, New Zealand, the United Kingdom and the US.
NAB introduced a2MC to a Chinese state-owned enterprise for an exclusive distribution deal for a2 Platinum infant formula into the China market.
This was the start of the journey of a2MC into China.
Following this initial launch, a2MC has made further key strategic decisions to enhance its overall presence and control in the area and has enjoyed a significant increase in infant formula sales and business profitability in Australia and China.
According to the Reserve Bank of Australia, about 15 per cent of SWIFT payments between Australia and mainland China and Hong Kong in 2015 were denominated in renminbi, up from 3 percent in 2012.
We are seeing that in the consumer goods sector, Australian department stores and importers of goods such as clothing and toys have established buying offices in Hong Kong to gain access to China.
These businesses are starting to move to renminbi and are benefiting from a wider pool of suppliers.
Businesses across Asia and the world are starting to see the value of using the renminbi as a trading currency.
In January, the Hong Kong Monetary Authority alluded to a brighter future for renminbi trade settlement.
It reported that in the first 10 months of 2015, renminbi trade settlement handled by banks in Hong Kong grew more than 10 percent year on year to 5.7 trillion yuan (US$880 billion).
In the same period, about 5.9 trillion yuan of mainland China’s external trade was settled in renminbi.
This is the first in a two-part series on renminbi trends
Renminbi globalization: Why it’s a world of challenges out there
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