With the aim of increasing international business and investment between Canada and China, Prime Minister Stephen Harper and Chinese Premier Li Kegiang announced in November that Canada would be designated as an official Renminbi (“RMB”) currency trading hub. With the RMB, also commonly referred to as the Yuan, having recently emerged as the second most prominent currency in trade finance behind the U.S. dollar, countries around the globe have been aggressively competing and bidding against one another to establish their own RMB trading centers. The RMB currency trading hub, which is estimated to become operational in Canada over the next three to six months, will be the first of its kind in North America. This move represents an important competitive advantage for Canada on the international trade and international finance plane.
In simple terms, the RMB currency trading hub is a centre authorized to complete RMB transactions at stable and predictable exchange rates. Currently, Canadians buying and/or selling in China typically have to convert monies used to finance their deals into an intermediary currency, which most often than not, is the U.S. dollar. An RMB currency trading hub in Canada will allow Canadian companies to transact directly in RMB, thus eliminating the often costly U.S. dollar middleman. In other words, the Canadian dollar will be valued directly against the RMB for the first time, thereby eliminating the additional layer of uncertainty in the foreign exchange market when converting in and out of the USD.
The introduction of the RMB trading hub in Canada is anticipated to significantly reduce transaction fees for both importers and exporters. 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.
China’s growth as an economic superpower is significant for global investment and holds particular importance for Canadians. China currently ranks as the second largest economy in the world and has quickly become Canada’s second largest trading partner. The potential for future growth is significant. Under the Canada-China FIPA, clear investment rules and measures have been formally established to protect Canadian and Chinese investors against discriminatory government practices. The FIPA has enhanced the overall predictability of the policy framework governing foreign investments between the two countries. The protections afforded under the Canada-China FIPA, coupled with Canada’s designation as an RMB trading hub, 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. The Canada-China FIPA set the ground rules and established a foundation for the continued development of the economic relationship between Canada and China. With the addition of the new RMB currency hub designation in Canada, the stage is set for increased trade and increased investment between both countries.
