Currencies with benefits

Moving into Q2, 2013 is fast on its way to being the year of the Chinese renminbi. The City of London initiative to make London the centre of offshore renminbi trading is well under way and all the big players in the banking community are looking to get a piece of the action.

Many multinational companies are already aware of the benefits of trading in RMB (currency: “Yuan” - ¥) and banks are busy extolling the virtues to the multitude of SMEs (small and medium sized enterprises) who can reap the renminbi rewards. UK companies can get a discount of up to 5% if they pay their Chinese suppliers in renminbi, and whilst only around 5% of China’s trade in goods are currently settled in renminbi, analysts expect this figure to treble by the end of 2013. China is the world’s no.1 exporter and no. 2 importer, accounting for at least 10% of all global trade, but with a more global and stronger renminbi, the cost of imports could be lowered and propel China into being the world’s no.1 importer. China already accounts for 15% of the world’s money supply and this is set to grow exponentially; banks wanting to take advantage need to be ready for when the custom increases. In 2012, Spot RMB forex grew to an average daily volume of US$ 1.7 billion, a whopping 150% increase on 2011 volumes. When they spot the opportunity, many banks will need front to back support.

Not only is renminbi very beneficial for transactions, it’s also a great way to diversify a portfolio, lower the costs of risk management and appreciate possible gains (as RMB continues to rise against the US dollar, for example) along the journey towards the currency becoming fully deliverable internationally. Offshore investors have bought nearly $2 billion of yuan-denominated bonds so far in 2013, up by over 70% on 2012. These RMB bonds, known as “dim-sums” are really starting to add up.

Whilst there are significant opportunities to be gained from business with China and RMB business, few analysts believe that banks are really ready to deal with the considerable changes to the Chinese financial system. The government of the PRC wants Shanghai, its effective financial capital, to become a genuinely global business centre but for this to happen, China needs a freely convertible currency within the next 5 years. There’s some disagreement over timescales but not about direction: This is happening! London, at the centre of a 24 hour global currency market, is set to benefit substantially from the renminbi revolution. Are your bank’s systems renminbi ready?