While it is evident that trade and investment in renminbi is gaining momentum and there has been overall growth in the value of global trade payments, one cannot deny that challenges remain before the Chinese unit becomes a preferred trading currency.
Across the globe, foreign business owners are still primarily conducting trade in the US dollar which accounts for 51.9 percent of trade payments compared with less than 3 percent for the renminbi, according to financial messaging provider SWIFT.
China still has a largely closed capital account and the renminbi is a controlled currency, so from a documentation and approval perspective, it is still harder to trade in renminbi than in freely tradable currencies.
As a result, businesses have no incentive to switch to renminbi and cannot leverage the opportunity to structure trade in the currency.
From what we have seen, businesses such as Australian agricultural companies often conduct trade in the Australian dollar or US dollar. They don’t see any cost benefits or ease of use in the Chinese unit.
Moreover, having a closed capital account also poses challenges for Chinese companies looking to take advantage of renminbi depreciation.
An example includes Chinese Ningbo United Group Import & Export Co., a trading firm from China’s east coast that exports steel products and garments and imports coal and wood.
The company recently announced that it settles just 5 percent of its foreign trade in renminbi, mostly with Chinese businesses operating in Japan and South Korea. The rest is denominated in US dollars and euros.
Nevertheless, despite the challenges of trading and investing in renminbi, there are exceptions.
For instance, if a company has market power and demands renminbi trade structures as part of a deal, there is an incentive for foreign counterparties to accede to their wishes.
To further lift the status of the renminbi among global currencies, the Chinese government needs to look at ways to incentivize trade and investment in renminbi and help foreign and domestic companies understand the benefits of doing so.
One approach the government has taken to further liberalise its capital account after its currency was admitted to the SDR regime is to allow limited renminbi convertibility in three new free trade zones — in Guangdong, Fujian and Tianjin.
These FTZs are expected to foster the greater use of renminbi payments in trade and finance, via measures such as allowing onshore institutions that are registered in the FTZs and that do not operate in restricted industries, to freely convert up to US$10 million worth of yuan annually.
Measures such as renminbi cash pooling in FTZs will enhance the capital efficiency of multinationals and enable greater visibility, control and flexibility in managing their onshore and offshore renminbi-denominated fund flows.
Based on the positive changes we are seeing, we think there is a bright future for China’s key trading partners, particularly businesses in Australia and New Zealand that engage in cross-border trade with China.
Soon, we may see the spotlight shift from turmoil in China’s stock market to the positive changes taking place around the renminbi.
This is the last in a two-part series on renminbi trends
Look beyond the stock market and pay attention to the renminbi
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