Renminbi set to replace US dollar for trade in Asia Pacific

Hong Kong moves to position itself as clearing hub for renminbi-based transactions

The Chinese renminbi is taking on an increased role in the Asia-Pacific region, and is expected over time to replace traditionally dominant currencies such as the US dollar and the euro for certain transactions.

Chinese government policy changes have enabled Asian corporates to settle trades with their Chinese counterparts in renminbi. And increased intra-Asian trading volume may lead Beijing to also consider allowing other trade-related insurance and derivatives denominated in renminbi to be done offshore, according to bankers and regulators in Hong Kong

Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority (HKMA), said Beijing is studying the idea of introducing more renminbi-denominated investment products in Hong Kong, expanding on the authorities’ approval for renminbi-denominated bonds issued by mainland financial institutions being made available for Hong Kong investors.

Currently, the renminbi is not fully convertible, but the Chinese government has made a number of arrangements with various countries so that trades between China and these countries could be settled directly in renminbi, instead of US dollars.

John Coverdale, HSBC’s global co-head of commercial banking based in Hong Kong, said Asia has come to an important juncture where the renminbi trade settlement pilot scheme launched in July has effectively made the currency a new force governing intra-Asian cross-border trades. “We are right at the dawning of the age of a wider convertibility of the renminbi currency and therefore a wider use of it for trade and other purposes,” said Coverdale. “We have not seen the evolution of a new currency for a long time. We can effectively call it a new currency in a newly emerged market. It is a new force.”

Since the inception of the trade settlement pilot scheme, 173 transactions amounting to 230 million renminbi ($33.6 million) have been conducted between mainland China and Hong Kong. The pilot scheme allows for 400 approved Chinese enterprises in five approved cities – Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai – to settle trades with their counterparts in Hong Kong, Macau and Association of Southeast Asian Nation (Asean) member countries.

Banks in these countries outside China are now allowed to open renminbi accounts with mainland banks for trade-related clearing, and enterprises in these countries can now also start to accumulate renminbi liquidity for trade purposes.

HSBC, for example, helped a Hong Kong manufacturer of printed circuit boards located in Guangdong province receive 15 million renminbi through its trade settlement services, which then used the funds to invest in renminbi-denominated bonds. “The next evolutionary step is that you’d see increased volume of trade settled in renminbi. The authorities in China will start to give us more exporters to settle with,” said Coverdale.

Stanley Chan, head of HKMA’s financial infrastructure development, says based on the $434.78 billion value of total trade volume in Hong Kong and Asean countries, if 5% of such import and export volume were to be settled in renminbi, it would translate into settlement volumes of $21.74 billion.

With $129.9 billion total export value to China from Hong Kong and Asean countries in 2008, a 5% trade settlement will translate to $6.5 billion of offshore renminbi liquidity.

“The renminbi has been stable since May 2008. It [qualifies as] an alternative currency to the US dollar in this region when viewed against other Asian currencies’ exchange rates versus that of the US dollar,” Chan told delegated attending the Asia Risk Congress 2009 in November. “Such stability incentivises companies in Southeast Asia and Hong Kong to use renminbi for trade settlement.”

Chan said the payment and security settlement system of Hong Kong also gives the city an advantage to develop as an important offshore renminbi clearing centre because of its seamless interface with the real-time gross settlement system of China. He says if a Southeast Asian bank wants to conduct foreign exchange transactions with a mainland bank – including derivatives transactions, if so allowed in the future by Beijing – they could do so by becoming a direct participant of Hong Kong’s real-time gross settlement system, which is also linked with the US dollar and euro systems.

“More importantly, there will be interbank money market between participants of this system… as direct participants of the [Hong Kong] settlement system can now freely lend and borrow to each other,” he said.

As the sources of fund and scope of assets in renminbi expand, banks might one day also be allowed to offer other financial services, such as renminbi-denominated insurance policies.
Meanwhile, Coverdale said he believes holders of renminbi-denominated bonds are now considering using these securities to obtain secured lending, not only in renminbi but also for any other currencies.

However, he considers the development of a renminbi interbank market in Hong Kong as being contingent more on the timing of when the currency becomes convertible. “An offshore renminbi interbank market will not be developed until the currency is properly and freely traded,” said Coverdale.

“There is probably a limited appetite for holding a currency that is not freely convertible, so from a risk perspective, an interbank market and convertibility of a currency tends to go hand-in-hand.”