Rise of the Redback
Today many Chinese exporters incur costs in renminbi yet they invoice in dollars, thus exposing themselves to currency risk.
China’s evolving currency is having a profound impact on trade, presenting new opportunities for those businesses bold enough to grasp them.
Ireland’s trade with China has grown exponentially over the past few years, pulled forward by the twin locomotives of extraordinary Chinese domestic growth and increasingly transnational industrial assembly lines. By 2011, Ireland’s import and export relationship with China was worth $4.5 billion, a 21 per cent rise over the previous 2 years. More than 200 Irish companies export to China, with 140 of them now having offices in China.
According to the latest HSBC Global Connections Irish trade forecast, our exports to China will grow by a further 11% a year during 2016 to 2030. China is expected to become Ireland’s fourth biggest trading partner by 2030, surpassing France and Japan along the way.
Globally, 10.5 per cent of China’s overseas trade, worth more than US$400 billion, was settled in renminbi last year. HSBC expects that share to rise to 30 per cent by 2015 as companies become increasingly aware of the potential benefits of invoicing and settling in the Chinese currency.
Today many Chinese exporters incur costs in renminbi yet they invoice in dollars, thus exposing themselves to currency risk. If the renminbi appreciates between the time the deal is struck and payment is delivered, they can lose out.
That sounds like a good deal for their overseas customers, but Chinese exporters charge for the service. HSBC estimates that many add around 3 per cent to their dollar invoices to cover currency risk. It follows that an HSBC survey of Chinese companies involved in international business indicated that 41 per cent would be willing to give discounts of up to 3 per cent on renminbi-denominated settlement, and 9 per cent were willing to give even larger discounts.
Until recently the perception that the renminbi was undervalued against the dollar, and would therefore only appreciate, also made it relatively expensive to hedge. Now markets are accepting that the currency is close to its long-term equilibrium value, making forward hedging significantly cheaper.
Though the renminbi’s life as an international currency only began in 2009, its meteoric rise has been assisted by the Chinese government, which has been steadily stripping away restrictions on its use. Policy restrictions that remain focus on investment flows into and out of the capital account rather than on trade.
Hong Kong has played a leading role in the global expansion of the renminbi, and it is still the largest and best developed offshore market for hedging and credit products. But China is in the process of widening the network of clearing centres outside the mainland, encouraging the development of new markets.
Taipei recently began accepting renminbi deposits, for example, whilst Beijing has appointed a clearing bank in Singapore and negotiations continue with London. HSBC Ireland has been providing renminbi accounts locally since the end of 2010.
And just as its geographic footprint is growing, the renminbi’s functional reach is being extended as new, more flexible products are developed. Deliverable futures are now traded in both Hong Kong and Chicago, accelerating the currency’s integration with the global financial system.
For companies in this country, a willingness to use renminbi today can mean more than just savings. It opens up a new layer of smaller Chinese suppliers who may prefer the ease of using their own currency, or who may be reluctant to take on dollar exposure because their cost base is denominated in renminbi.
In short, the evolution of the renminbi represents a unique chance to cut costs, to reduce financial friction in the supply chain and, ultimately, to start new business relationships.
By Eoin O’Sullivan, Head of Global Markets, Ireland for HSBC
HSBC Bank plc, trading as HSBC Corporate & HSBC Corporate Banking Ireland, is authorised and regulated by the Financial Services Authority in the UK and is regulated by the Central Bank of Ireland for conduct of business rules.