Internationalising the RMB

About five years ago, a Chinese friend told me that the internationalisation of the Chinese currency was a “global mega trend”. I didn’t believe him at first but I do now! Whilst the idea that the Chinese currency (which at the time was non convertible and under tight capital controls) could one day become an internationally traded currency, and even replace the USD as the world’s international reserve currency, was almost laughable, the general consensus today is that this could even happen before the end of this current decade. He was right. It is a global mega trend and everyone is paying attention now!

The Chinese Renminbi (RMB) was the second most traded currency in the world last year after the USD, overtaking the Euro. Following the $30 billion dollar currency swap agreement signed between the Reserve Bank of Australia and the People’s Bank of China in 2012, there have been two recent strategic steps in Australia to advance the investment and trade relationship with China which in turn reflects the tone and tenacity of the Chinese government with regards to the internationalisation of the RMB.

Recent examples of some progression on this issue from an Australian standpoint include:

1. Direct Currency Convertibility - Simplified trade and Investment between China and Australia

In April 2013, former Prime Minister, Julia Gillard signed a deal that saw the Australian dollar become the third currency (after USD and JPY) to be directly convertible to the Renminbi. In the words of Lao Tzu, “the thousand mile journey begins with one step” – we have lived through the first step towards the internationalisation of the Renminbi and Australia is now at the forefront of the journey. Direct convertibility between the Australian Dollar and the Renminbi will allow business conducted between Australia and China to be directly converted to the respective currencies, without first converting to the US dollar, thus reducing transaction costs. ANZ and Westpac are the first Australian banks licensed to make the market for the currency in China. In the long term, the removal of this barrier will significantly reduce the cost of the two nations doing business with each other. The importance of Gillard’s contribution to the Australia-China relationship should not be underestimated and it has put Australia in a competitive position in the Chinese market, including the ability to negotiate better pricing terms with our Chinese counterparts.

In the months following the deal, there were sharp spikes in RMB/AUD trading and, whilst this volatility has reduced, volumes have increased from US$300 million in March 2013 (one month prior to the deal) to approx. US$3 billion worth of currency flows today. With strong growth in global demand for Renminbi payments, settlement and financing, direct conversion is the first major step towards liberating the market and internationalising the Renminbi.

In theory, the AUD/RMB direct conversion arrangement will provide a more accurate reflection of the developments in the Sino-Australia trade relationship, irrespective of what’s happening in the United States. The move will also reduce exchange rate risks for traders and businesses, potentially leading towards a more stable RMB/AUD exchange rate in the long term, and greater confidence and certainty for entrepreneurs, businesses and even Governments.

2. Payments Platform – A trading hub for the Yuan

A more recent major milestone for the Australia-China relationship is the recent joint venture between the Australian Stock Exchange (ASX) and the Bank of China to launch a payments platform for the Renminbi in Australia, providing an opportunity for the ASX to become a trading hub for the Renminbi. The platform will be run on the ASX’s Austraclear market infrastructure, which already settles over AUD3 trillion each year, and will allow companies to make and receive payments from their Chinese trading partners in RMB.

The ASX identify three key benefits arising to Australian companies from the new service:

  • Increased accessibility – allowing Australian companies to use the Renminbi as a settlement currency in cross border transactions;
  • Growth opportunities – the growth and development of a range of Renminbi denominated derivatives, increasing the global connectivity of Australia in global financial markets; and
  • Reduced risk and costs – the elimination of transaction costs and exchange rate risks

This new strategic joint venture will benefit both China and Australia in the RMB internationalisation process as Renminbi denominated financial markets become more sophisticated and attract greater transaction volumes. Australia has the opportunity to be at the forefront of developing more diverse financial products and can also simplify the ability of Chinese companies to issue debt and public share offerings.

These are exciting times for the Australia-China relationship and the more progressive, entrepreneurial and forward thinking companies and businesses will take advantage of every opportunity to invest, trade and/or receive payments directly in RMB from their Chinese counterparts. Most of the major banks now offer multi-currency facilities and trade financing arrangements to facilitate the process, and there is increasing awareness of the benefits of the new AUD/RMB direct conversion arrangements.

This is a global mega-trend. Be the first to profit from it!