With the aim of increasing international business and investment between the two countries, China announced in November 2014 that Canada would be designated as an official Renminbi (RMB) currency trading hub. In simple terms, an RMB currency trading hub is a centre authorized to complete RMB transactions at stable and predictable exchange rates. The formal launch ceremony for Canada’s Toronto-based RMB clearing hub is scheduled for March 23, 2015.
The process of internationalization of the RMB began in 2008 and rapidly accelerated in 2009 when China established its dim sum bond market and expanded its Cross-Border Trade RMB Settlement Pilot Project, to help promote the establishment of pools of offshore RMB liquidity. The internationalization process continued to move forward with the conclusion of China’s various currency swap agreements with countries such as Argentina, Brazil, the UK and recently Canada, to name a few. This is the first time in decades that a national currency makes an attempt at internationalization since the Japanese Yen in the late 1990’s, which generated lukewarm success.
With the RMB having recently emerged as the second most prominent currency in trade finance after the U.S. dollar, countries around the globe have been aggressively competing and bidding against one another to establish their own RMB trading centers. China has become a key growth market for Canadian companies and the importance of China’s economy, now standing firm as the second largest economy in the world, cannot easily be overlooked. For instance, in 2013, Canada-China merchandise trade totalled $73.2 billion, and China was Canada’s second largest export destination worldwide. In terms of investment, Canadian FDI into China in 2013 totalled $4.9 billion in 2013, making it Canada’s 19th largest destination for FDI, and Chinese FDI into Canada totalled $16.7 billion, making in the 8th largest source of FDI in Canada.
The RMB trading hub will bring with it important advantages for Canadians conducting business in, or investing in China including:
- First-Mover Advantage – The Toronto centre, set for launch on March 23rd, 2015, will be the first RMB trading hub in the Americas. This represents an opportunity for the Canadian financial sector, and specifically for Canadian financial institutions to gain a competitive advantage by being able to develop and provide a full spectrum of RMB products to Canadian businesses, including innovative services for more robust RMB trading and the provision of a broad range of RMB-denominated products related to trade finance or investment purposes (such as bonds).
- Increased Global Competitiveness – There is a clear and steady growth trend in RMB trading across the globe – trade settlement in RMB in China grew from 8.8% in 2011 to 17.9% in 2013. According to SWIFT, the RMB is now the fastest growing settlement currency and recently rose to the #5 position in terms of world payment currency, overcoming the Aussie Dollar, the CAD and the Swiss Franc. This number is expected to continue to rise. According to HSBC Bank Canada’s research, only 5 % of Canadian companies have conducted business using the RMB, in comparison to 17% in the U.S. and the 22% global average. In addition, 74% of Canadian companies expect to start increasing trade with China over the next fiscal year. The Canadian RMB trading hub will allow Canadian companies to become more competitive with international companies who already deal in RMB (i.e. Europe and Asian firms) by exploring and providing RMB options and services to better meet growing client demands and increase market share in China.
- Lower Risk – Currently, Canadians buying and/or selling in China have to convert monies used to finance their deals into an intermediary currency, the U.S. dollar. This additional conversion creates additional foreign exchange risk for both Canadian and Chinese companies. With the introduction of the currency hub, USD conversions will become obsolete, thereby enabling Canadians to hedge foreign exchange currency, minimizing overall foreign exchange risk associated with their business transactions. In other words, RMB will be available at a protected rate and transactions will be handled by Canadian banks to streamline the process of paying suppliers directly in RMB.
- Lower Cost of Trade – Because transactions between Canadian and Chinese businesses must be made via the USD, exchange rate commission costs are typically doubled for firms on either side of the deal. According to a study conducted by Advantage BC, Canadian companies are, on average, forced to add between 5-8% to their prices to cover currency transaction costs. That 5-8%, accumulated on an annual basis, could represent the addition of billions of dollars to the price of imported goods. Chinese companies would also save money by reducing hedging costs and risk, overall. In fact, a recent HSBC survey showed that Chinese companies would be prepared to offer as much as 5% price benefit to deal directly in RMB. These favourable quotes can be provided to Canadian suppliers with the introduction of the currency hub because management of foreign exchange risk is eliminated, and there is an important reduction of costs due to the elimination of the use of agents to manage limited USD liquidity.
The Canada Chamber of Commerce stated in a Report that over the next decade, “the direct benefits of an RMB trading hub would be an additional $21-32 billion of exports, plus potential discounts in imports totalling $2.8 billion.” HSBC Bank Canada indicated that the increase in investment that would be driven by the presence of an RMB trading hub in Canada would easily be in the range of $22 million by 2018. Additional drivers of trade between Canada and China beyond the RMB trading hub include the Renminbi Qualified Foreign Institutional Investor Program (RQFII) with its quota of 50 billion RMB, which allows Canadian institutional investors access to the Chinese capital markets, and the recently implemented Canada-China FIPA, which provides clear investment rules and measures to protect Canadian and Chinese investors against discriminatory government practices. While the trading hub and the RQFII allow Canadians better access to the Chinese market, the FIPA has enhanced the overall predictability of the policy framework governing foreign investments between the two countries and effectively reduced some of the inherent risks. The protections afforded under the Canada-China FIPA, coupled with Canada’s designation as an RMB trading hub, and the RQFII will give Canadian businesses further impetus to expand their presence in, and partnerships with China to take advantage of the economic possibilities and help them gain access to the rapidly developing Chinese market.
