Over the last decade, China has achieved significant strides, in terms of foreign investment and international trade. Launching of the One Belt One Road project (OBOR), back in February 2014 with capital of USD 40 billion has certainly contributed to drive the country closer its objective of being a world dominant economic power. However one of the major challenges, back in 2012 had been the internalisation of the RMB
Initial doubts expressed on the ability of the renminbi to match the prowess of dominant currencies, namely US dollar and Euro have been quashed by the resounding ascending of the RMB. The latest report “ Renminbi internationalisation Survey 2016” by Hong Kong based HSBC enables us to understand the rise to maturity of the world’s fastest growing currency.
A decade ago, the RMB was rarely used outside China’s borders. Today, it is seen as one of the top global currencies. International adoption is accelerating as RMB makes significant strides towards full convertibility.
Since 2012, we have seen year on year increases of companies adopting the currency in a growingly multifaceted way, accompanied by a maturing global infrastructure for RMB use. As more RMB products and services are being created to facilitate cross border flows with China, we are also gaining a greater understanding of the challenges and needs foreign businesses encounter in region.
It is also reassuring to see that more companies than ever before understand the benefits of RMB adoption as well as the new opportunities it presents both in China and across the globe. Corporates are also finding the documentation and laws around the currency easier to understand, contributing to an increase in RMB use to settle cross border trade.
Additionally, this newfound level of understanding has enabled RMB usage trends to stabilise, meaning there is now a clearer consensus on how companies are using the currency to good effect and where there are shortcomings to be addressed.
Not only does this data help give a clearer view on RMB use and opinion around the world, it can help us gain new foresight into where these trends may shift in the future. As RMB internationalisation continues and China entrenches within the global supply chain, this newfound perspective on the market can help corporates that work with China more confidently switch to RMB and enhance their competitiveness.
To compile the 2016 edition of our RMB survey we commissioned a comprehensive study on RMB use across a global spectrum of companies. A total of 1,600 businesses were polled across 14 markets between May 23 and July 5, 2016, on the basis that they currently conduct business in and with mainland China. In terms of size, the companies all had turnovers ranging from USD 3 million to upwards of USD 500 million.
The following pages offer insights into how RMB usage is evolving, and will give you a clearer understanding of how companies are using the currency to overcome challenges and secure new growth. It will also focus on the emerging trade and infrastructure opportunities presented by China’s Belt and Road Initiative.
HSBC considers RMB to be a growing global currency in all respects; from trade and payments, to investments across various products and channels and finally an established reserve currency. Firms now switch to RMB to reduce costs, hedge risks, engage Chinese partners and win new business overseas.
RISE OF THE REDBACK: WHAT DOES THIS MEAN FOR BUSINESSES
The message is clear: RMB adoption is accelerating with usage rates increasing year on year both within China and around the world. We found that 24% of global companies today use the currency for cross border business, compared to 17% in 2015.
This rise in adoption can be attributed to several factors, a continually evolving RMB infrastructure including the new and improved Cross border Inter-Bank Payment System (CIPS). Businesses also have a better understanding of RMB documentation and rules and trading counterparts are more comfortable using RMB. Banks play an important role in supporting clients in understanding local regulations.
Treasury and cash flow solutions are increasingly supportive of the currency, enabling corporates to integrate RMB into their operation, handle payments and receivables more smoothly and with greater transparency.
We found 35% of firms in the Asia Pacific region are actively using RMB this year for cross border payments, compared to 26% in 2015. Taiwan contributed greatly to this increase with an adoption rate of 65%, up from 38% in 2015, followed by Hong Kong at 48% and mainland China as a whole at 45%.
Equally significant, HSBC is seeing greater diversity in RMB use beyond the Asia Pacific region including Europe and North America. This is partly a result of more RMB clearing banks established by China’s central bank, People’s Bank of China (PBOC), around the world and more currency swap agreements to facilitate RMB liquidity. With China’s increasing transaction flows with the rest of the world, global firms find it more logical and convenient to switch to using RMB for cross border business.
As the world’s largest trading nation, China’s sizable business linkages with the rest of the world is and will continue to underpin the rise of the redback. The Chinese Presidents announcement of the ‘Belt and Road’ initiative to boost the flow of trade, capital and services between China and the rest of the world will be an important driver for the continued internationalisation of the RMB. Domestically, China’s consumer demand and infrastructure development that are bolstered by unprecedented urbanisation rates and the latest Five Year Plan, will see to sustainable growth in it’s economy.
This has bearing on how the RMB is expected to be used. Our findings suggest that import and export trading is likely to remain the predominant RMB cross border transaction undertaken by businesses globally, with 80% of corporates expected to use this type of transaction in the near future; although trade financing is set to grow in popularity. The benefits of using RMB to reduce foreign exchange risks and costs, as well as gain more competitive prices, will continue to be an influencing variable.
Overall, RMB adoption is picking up pace not just in Asia Pacific but across other regions, making the RMB a global trade and payments currency. China’s continued economic growth and trade drives the currency’s wider use, which in turn means that global firms that work with China will need a considered RMB strategy to capitalise on its many benefits. Otherwise they are likely to fall behind their competitors.
OUTLOOK: RMB GROWTH OVER THE NEXT 12 MONTHS
Four in 10 global businesses expect to see an increase in RMB use in 2016*, due to increased awareness around the currency’s benefits and a rise in trade opportunities emerging between China and the rest of the world.
This trend is slightly down from 2015’s survey, when 56% of global businesses anticipated an increase. This is attributed to several factors over the last 12 months, including concerns of a slowing Chinese economy, sharp losses in China’s stock markets and short term currency volatility following the exchange rate reform in August 2015. This has had an impact on global RMB usage though we have since seen signs of a more market-oriented and stable RMB.
Hence, expectations of future RMB use are strong across all regions, more so in countries outside of Asia Pacific where knowledge of RMB use was lower. Our findings show that around 61%* of European firms expect an increase in RMB use to settle cross border business, followed by North America (48%) and Asia Pacific (39%). This reflects trends around increased RMB awareness which we explained before.
These expectations are underpinned in part by confidence in the ongoing reforms for RMB internationalisation. In particular, China’s Free trade Zones (FTZs), such as the earliest established ones in Shanghai, Guangdong, Fujian and Tianjin, have introduced policies to encourage high-end production and services and innovative financial reforms. They have helped boost RMB usage through cross border RMB sweeping, offshore RMB borrowing, cross border centralised cash management solutions – all of which are designed to ease financial transactions and thus encourage foreign companies to shift more business to China. Seven more FTZs are being established, including inland areas for the first time, creating more hotspots of growth opportunities and RMB use for foreign firms.
We have mentioned drivers of increasing trade flows between China and the rest of the world, aided by sustainable domestic growth but also policies like the Belt and Road Initiative. This aligns with the momentum around the use of RMB as a multifaceted currency. Already an established trade and investment currency, the RMB has recently entered the International Monetary Fund’s (IMF) Special Drawing Right basket, cementing its status as an elite reserve currency. This translates into a stronger foundation for easier global RMB use for companies around the world.
Exchange Rate Outlook
As RMB edges closer to full convertibility, businesses – both large and small – are considering how the currency’s foreign exchange rate will shift over the next 12 months and beyond. Opinions on this matter vary from market to market, but it is encouraging to see that transparency in this area is improving, which helps corporates understand how RMB is performing on a global scale.
7 in 10 of global businesses believe that the RMB exchange rate volatility will decrease or remain the same. Around 46% of firms in mainland China that expect to do overseas business have expressed that they anticipate RMB volatility to decrease over the year ahead, with 68% agreeing in Taiwan, followed by 61% in Hong Kong. 56% of companies globally expect RMB volatility to remain static, a sentiment largely reflected in Singapore, Australia and Korea.
The results suggests that countries in greater china region, which undertake more RMB business due to comparatively larger bilateral trade flows, tend to be more optimistic about lower currency volatility than their European and North American counterparts.
Worldwide, firms with sales turnover of USD500 million or more are almost evenly split, with 30% expecting currency volatility to decrease, 36% expecting it to remain static, and 34% anticipating rates will become more volatile. Companies with less turnover lean increasingly towards the view that volatility will remain the same.
We have found that concerns around foreign exchange volatility stem largely from macroeconomic trends, such as downturn felt in several global markets. Reassuringly, the overarching view from corporates within mainland China is increasingly optimistic and the sentiment is that this volatility is expected to lower in future.
By taking a strategic view on how RMB is integrated within treasury, cash flow and working capital functions, a business can work towards mitigating the impact of foreign exchange rate shifts. With new platforms and products being designed to facilitate RMB use, transparency and liberalisation should continue to flourish.
GLOBAL DRIVERS OF RMB USE
As China’s prominence within global markets grows, the application of RMB could shift as more firms use the currency to settle international trade.
For example, we found that globally, 80% of corporates will likely use RMB to facilitate import-export trading in the near future, with the highest interest coming from firms based in the Middle East, Europe and Asia Pacific. Notably these regions are poised for greater connectivity to China as part of its Belt and Road routes.
We are currently seeing RMB being used across an increasingly diverse range of business functions. Our report finds that globally, documentary credit (DC) and trade financing will likely be the currency’s second most popular application, a trend that is most prominent in the Middle East. Meanwhile, in third place, RMB use for liquidity management is expected to be most popular across the Middle East at 25%, followed by Asia Pacific (17%) and Europe (15%).
As mentioned before, exchange rate reform and liberalisation of the RMB has allowed it to evolve beyond its position as a top five payment currency and most widely traded emerging market currency. We have also seen an enlarged pool of offshore RMB liquidity created through growing offshore RMB deposits that facilitate offshore RMB lending, the opening of capital markets to facilitate in and outbound RMB capital flows, issuance of RMB-denominated offshore (or Dim Sum) bonds and diversified RMB investment products and services.
PERCEIVED BENEFITS OF RMB USE BY REGION
Beyond Asia Pacific markets, the reduction of foreign exchange risks and costs has emerged as the primary driver of RMB usage, followed by the ability to price competitively.
The picture is different for businesses in mainland China, where reserving RMB to capitalise on currency appreciation is the second most popular benefit. This correlates with our findings that corporates across mainland China feel strongly that RMB volatility will subside over the next 12 months and beyond.
Simultaneously, businesses situated within the Pearl River Delta feel strongest that RMB will help them receive requests from trading counterparts, which may bode well for foreign firms seeking a foothold in the region. Outside of the survey results, HSBC has seen various examples of foreign firms pairing with domestic companies to gain a better understanding of the Chinese market and set up or expand local operations.
In the west, North American firms feel the key benefits are reduced foreign exchange rates or risks (55%) followed by cheaper and more competitive prices (50%), which is echoed by Europe with 60% and 48% for both categories. We have seen firms utilising RMB for these very reasons when paying Chinese partners or vendors, and this will remain a benefit moving forward.
Beyond Chinese borders companies in the Middle East appear to buck trends in many aspects of RMB adoption. Across the region sentiment appears to be more optimistic around usage, particularly where matters of reduced cost, winning new business and competition are concerned. This view could present new opportunities to Chinese firms looking to trade or invest in the region.
85% of firms with turnover of between USD3 million–USD50 million that expect to use RMB for import/export activities in the next 12 months.
45% of European companies receiving RMB requests from trading counterparts in 2016.
50% of North American firms using RMB to get cheaper pricing or offer more competitive pricing.
PERCEIVED CHALLENGES OF RMB USE
While corporates around the world have expressed differing opinions on the perceived benefits of RMB adoption, we are also seeing trends around potential challenges attached to the currency. However, with an increasing number of case studies and data to refer, we continue to gain a clearer understanding of how corporates are overcoming these issues and resolving them to their advantage.
We have seen that firms are finding it easier to integrate RMB into their daily operations, thanks to continually evolving payment and treasury platforms and better access to support on the ground in mainland China. Additionally, the nation’s ongoing economic and financial reforms will support these advancements moving forward.
We found that 41% of global RMB users have expressed that they expect to encounter no difficulties using the currency in the next 12 months, compared to just 20% in 2013, reinforcing many trends highlighted in this report that demonstrate the growing ease and understanding around RMB utilisation in cross border business.
Nevertheless, 30% of global firms feel that regulations around RMB are still unclear and subject to change. This is reflective of wider complaints by foreign companies in mainland China about varying interpretation of regulations from province to province in China. The same companies added that the required documentation around RMB adoption and use is complicated, and this could create barriers to entry for companies that are perhaps unprepared.
In-house research and the support of a banking partner with knowledge of the Chinese market can help businesses articulate the benefits of RMB adoption, interpret regulations to facilitate RMB use and overcome the challenges it may present. As a leading international bank for RMB business with strong local expertise through our extensive network in China, HSBC has done exactly that for our clients.
WHY NON-RMB USERS HAVE REFRAINED
We also polled firms that have refrained from introducing RMB into their treasury operations, in an attempt to understand where their reluctance lies. Our findings show that 63% of corporates simply do not perceive a clear benefit of using the currency, or have not fully considered the implications yet. This could be in part due to wider concerns around China’s economy or short-term volatility of the RMB, which is why it is important to understand specific benefits to a business, from hedging to risk and liquidity management. This correlates with the view of 20% of non-RMB users, who felt that they had not yet found the right banking partner to guide them through the benefits and procedures of switching to RMB. This suggests that a lack of knowledge is perhaps creating hesitation, particularly in the Middle East, where this sentiment is strongest.
Despite this reluctance, we see that global and Chinese businesses continue to gravitate towards RMB usage year on year. This trend should continue as China takes steps to lower the barriers to RMB usage and bring the currency towards full convertibility. Our findings show that in 2013, 40% of firms using RMB felt that the currency’s regulations were unclear, compared to just 30% in 2016, and while 42% were confused by documentation in 2013, just 30% share that view today. This sentiment underlines the growing understanding of RMB benefits and ease of use around the world.
It is clear that while corporates are aware of growth opportunities within China, many are simply confused or unsure of the rules and laws surrounding RMB use. Working with a partner that has a clear understanding of the Chinese market can help businesses navigate these issues with confidence.
BELT AND ROAD: HOW CHINA IS DRIVING TRADE AND INVESTMENT FLOWS ACROSS THE GLOBE
Two in five (41%) global businesses are aware of China’s Belt and Road Initiative (BRI) to some degree, but only 7% of corporates feel informed enough to develop a strategy to capitalise on the opportunities it presents.
HSBC feels there is a genuine opportunity for foreign firms to partner with Chinese corporates on the development of BRI infrastructure. While the initiative is still unfolding, both Chinese and foreign firms have begun to establish contracts and execute projects across sectors like transportation in rail and port logistics, energy and resource development. It is also worth noting that the ongoing urbanisation in countries along BRI routes has given rise to development needs for new ‘smart cities,’ which will require new technologies, sustainability planning and green financing. The cost of financing the BRI is immense. China initiated the creation of the Asian Infrastructure Investment Bank (AIIB), founded by 57 countries, with committed capital of USD100 billion. Additionally, a Silk Road Fund was set up in China to fund Chinese companies involved in projects along BRI.
The ripple effect of opportunities from Belt and Road infrastructure projects are multi-fold. In the wake of large-sized commitments are opportunities in sub-contracting and supply chain services in local projects, acquisitions of machinery and technology, services and more. Chinese companies are able to gain a viable foothold in the local markets while local players are able to capture upscale opportunities.
Collectively, the impact of more and improved land and maritime routes will translate into large trade corridor and regional flows. Overall, our findings show that 58% of Asia Pacific corporates are aware of BRI, followed by 50% in the Middle East region, and 22% in Europe. However over half of global firms who are aware of the initiative (53%) do not have full sight of the opportunities it could bring their business. This suggests that clients need further insights into BRI expansion and the potential benefits, which correlates with our findings that 63% of global firms admit to requiring banking support and information. A further 62% stressed they would like to receive online resources to keep them up to date on new BRI developments.
Belt and Road awareness is undoubtedly high within China, suggesting that a majority of domestic firms are receptive to utilising this growing infrastructure to facilitate the movement of trade, secure new contracts and connect with global markets. Corporates with an interest in China should now be considering how BRI infrastructure development and RMB adoption can, together, help them nurture new growth within this increasingly outward-facing market. Forming a strategic approach and securing the assistance of a banking partner early can ensure firms are poised to act when opportunities arise.
Belt and Road explained:
The Belt and Road Initiative (BRI) is an ambitious and multifaceted strategy first announced by Chinese President Xi Jinping in 2013. Through improved land and maritime routes, BRI aims to boost the flow of trade, capital and services between China and the rest of the world, connecting over 65 countries across Asia, Middle East, Africa and Europe.
The vision is to create the infrastructure network, financial and policy conditions that will facilitate regional trade and investment cooperation. The financial needs for BRI infrastructure projects are immense. In Asia alone, the Asian Development Bank (ADB) estimated that up to 2020, infrastructure needs would cost USD800 billion a year. It is all part of China’s plans to encourage it’s businesses to venture beyond its borders. Sectors such as transportation and logistics, construction and energy are most likely to benefit from Belt and Road. Global financial centres along the Belt and Road, such as Hong Kong and London, will have critical roles to play when it comes to capital raising and investment activities.