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Why the RMB Needs to be Part of Your Business Strategy

  • By Vina Cheung
  • Published: 1/6/2016
For more perspectives on the renminbi, be sure to check out the CTC Guide, The Internationalization of the RMB: A Treasury Perspective. DOWNLOAD

rmbstacksThe recent inclusion of the renminbi (RMB) into the Special Drawing Rights (SDRs), a reserve asset managed by the International Monetary Fund, is a major milestone in China’s mission to globalize its currency. The decision has been a long time coming, and has effectively granted the status of global reserve currency on to the RMB.

At first glance, it looks like the kind of development that should be of primary interest to central bankers, who will be thinking about how to reallocate their reserves to match more closely the currencies that make up the SDR. With a little reflection however, it should be clear that the move by the IMF is a reminder for companies across the world that the RMB needs to be part of their business strategy.

The reasoning is as follows. The RMB’s newfound status as a reserve asset is going to, over the medium term, boost demand for the currency among central banks. A recent Bloomberg poll of reserve managers gave a median prediction that 10 percent of global foreign exchange reserves will be held in the Chinese currency by 2025.

To put this into perspective, there is currently $7.8 trillion worth of reserves globally outside of China. So if such a diversification were to take place today, it would require nearly $800 billion to go into RMB-denominated assets.

As countries hold more of their wealth in the RMB, it gives a powerful sign to businesses that the currency is a viable store of value. The result will be an uptick in companies using the currency to settle international trade.

At the same time, China’s capital outflows are growing rapidly, as local investors diversify into foreign assets. Outbound investment by businesses and individuals is expected to generate $1.5 trillion worth of outflows by 2020.

The RMB will therefore be stuck in the middle of a supply and demand tug of war that is set to increase the level of two-way volatility in its exchange rate. It will be a sharp turnaround from the situation just a few years ago, when the Chinese currency was considered by many to be a one-way bet on appreciation.

Any company that does business with China should take note of this upcoming chain of events, as movements in the RMB are set to become a consideration that cannot be ignored. Different companies however, will have different areas of focus.

A manufacturer, for example, that sources some of its parts from China may well be mostly focused on the exchange rate, which could influence the cost of some of its components. A foreign firm that is investing in China while directly trading with local customers, will need a more advanced currency strategy that not only takes into account the value of the RMB, but also the liquidity conditions to ensure that it can get hold of enough cash to meet its obligations.  

With volatility in the RMB increasing, the costs of eschewing currency considerations could be considerable—even for companies that have a small direct exposure to China. As the world’s second largest economy, it has a huge influence on everything from the health of emerging markets to the price of commodities. A significant shift in the outlook for the RMB could therefore have a substantial impact on financial markets, trade flows, and even international relations.

We got a taste of the renminbi’s importance during the summer, when the People’s Bank of China increased the currency’s flexibility via a one-off adjustment that led to a sharp, but short-lived, devaluation. Financial markets went into a spin, and the media was quick to announce that China had fired its first shot in a global currency war.

The panic quickly died down, and although the central bank’s move was a shock to some, for those who pay close attention to the renminbi, it was simply the latest step in China’s long-term goal to introduce more market forces into the value of its currency.

There’s no one-size-fits-all RMB strategy that is applicable to all companies. Every business needs to find an approach that fits its circumstances. But what’s clear is that despite encouraging signs that companies want to do more business with China, many firms are missing out on the chance to get ahead of their rivals by including the RMB into their business planning. According to HSBC’s RMB survey this year, only 22 percent businesses are using the currency to settle trade.  

The trend though, is clear—the RMB is on track to enter the top tier of global currencies, and the IMF’s SDR decision is only the latest reminder. The imperative for businesses the world over it is to make the currency a key part of their foreign exchange considerations. Those who fail to do so, could find themselves playing catch-up with their competitors.

Vina Cheung is HSBC’s Global Head of RMB Internationalization.

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