Wednesday, June 15, 2016
The Internationalisation of China’s Renminbi (RMB) beckons Australian companies
China has been, and will increasingly be, one of Australia’s most important strategic trading partners. Australia’s richness in natural resources fuelled much of China’s growth in the past, but now, as China transitions to an economy based on domestic consumption, coupled with the stimulus provided by a rising middle-class population, the next growth phase will manifest in higher demand for agriculture, education, tourism and financial services. Australia is well positioned to benefit from this demand given its competitive advantage in these industries.
The much-talked about China-Australia Free Trade Agreement (ChAFTA) further strengthens the strong ties between the two nations. More importantly, the “most favoured nation” clause in the ChAFTA means Australia will benefit from any future incentives announced by China with respect to trade or investments.
Big strides have been made in RMB internationalisation, the most recent being the International Monetary Fund’s (IMF) announcement to include RMB into its Special Drawing Rights basket (SDR), an important milestone in the integration of Chinese economy into the global financial system. This is the first time that the SDR basket has been altered in over 15 years, and the IMF’s decision followed the assessment that RMB is “freely tradable”.
Looking back, the introduction of RMB cross-border trade settlement scheme in 2009 really kicked off the internationalisation process. Today RMB can be used to settle cross-border trades and services, and given China’s position as the world’s largest trade country, this has clearly helped fuel the demand for the currency. The impact is visible with RMB already the fifth most used for payments and second most used for traditional trade finance transactions globally.
The development of an offshore market for RMB, including the creation of swap lines with numerous central banks around the world and the launch of direct trading with other major currencies, has been instrumental in increasing the usage of the currency beyond China. Australia (Sydney) became an offshore hub in November 2014, providing a platform to Australian companies to settle cross-border trades with China on a near real-time basis.
Demand for RMB in Australia started from a low base but is growing rapidly as companies become aware of the options available to them, and familiar with the ease and benefits of using RMB. This is especially the case in trade, supply chain finance and foreign exchange.
Several free trade zones have been set-up in China to help multinationals effectively manage their capital by allowing greater flows of funds globally.
Further, China has been promoting RMB as an investment currency with various programs that allow foreign investors to access the Mainland Chinese market. Australia was allocated RMB Qualified Foreign Institutional Investor quota of RMB50bn in 2014, allowing our institutions to invest directly in Mainland China securities. China has also encouraged its companies to use RMB to invest overseas.
It is estimated that over 25% of China’s overseas direct investment was denominated in RMB in 2014 up from 0% just three years ago.
RMB is rapidly evolving as a funding currency, and with China’s bond market ranked the third largest globally and reforms introduced over the last year, foreign companies can now access both the offshore and onshore bond markets with greater ease.
With the expected growth in bilateral trade and investment between Australia and China and continued liberalisation of the Chinese currency, RMB is expected to be increasingly used as a trade and an investment currency. Australian companies have the opportunity to position themselves and take advantage of this rapidly changing landscape as they get ready to expand their businesses with China.
Sangeeta Venkatesan is the CEO of APP Securities.