RMB Trade Settlement Growth To Slow in Q3, Bankers Fear

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Written by Mark M. Johnson
Tuesday, 20 December 2011

Increasing renminbi trade settlement in the last nine months combined with renminbi net open position rules imposed in Hong Kong could slow trade settlement in the Chinese currency, according to trade finance bankers. The squeeze will be short term, however.

Trade settlement in the Chinese currency has been on the rise of late, but the growth is set to slow in quarter three, according to trade finance bankers. Any pare back would be down to the rapid clip at which conversion of trade settlement in other currencies to renminbi has already occurred, says the Tom McCabe, head of global transaction services for DBS.

Further tightening of the renminbi net open position rules for Hong Kong banks could further impact the market, according to another trade banker.

"The amount of the renminbi book has now grown to a size where it is [already] a significant business force," said McCabe. "It has caught up to a reasonable level in the market to where the low-hanging fruit has already been converted."

According to a trade finance banker at a competing bank, Beijing is considering tightening its restrictions on Hong Kong banks' net open positions. A 10% cap was introduced in December last year by the Hong Kong Monetary Authority in agreement with the People's Bank of China, meaning banks could not exceed net open positions of 10% of their renminbi assets or liabilities, or whichever is larger.

"They're trying to readjust the calculation methodology for this quarter which is going to squeeze banks' ability to access the onshore rate that will mean banks will have to use the CNH or offshore rate," said the banker.

This will affect the ability of banks to sell non-deliverable forwards (NDFs), which are derivatives used to hedge foreign exchange risk in renminbi-denominated trade finance and are priced based on the onshore rate (CNY).

A deliverable forward can be used instead, denominated in the offshore rate (CNH), but rates are not as attractive, according to the banker.

"I would still expect that we would see continued growth in RMB denominated trade … and I wouldn't expect that trend to vastly change but it may slow down," said the banker.

McCabe was also quick to point out that whatever the short-term trend is, the longer-term rise of the renminbi as a trade settlement currency is inevitable.

"The forward looking view at three to six years says that the renminbi will continue to be an important tool in any corporate treasurer's currency arsenal to determine how they manage efficiency in their business," he said. "And if there's more domestic consumption in China there's going to be both ends of the trade … that will be done in renminbi."

McCabe also noted that large Chinese corporates are increasingly building regional treasury centres in Singapore and Hong Kong. This is a trend that, in his view, will lead to more assertiveness among Beijing's state-owned-enterprises and Shanghai's private sector abroad in a way that will dictate how trade will be conducted in the future.

"Just within the last six weeks I've seen more [requests for proposal] for Chinese companies wanting to set up regional treasury centres in Hong Kong … than I saw in the six months before, and those are the on the ground customer behaviours that are going to drive more growth in the renminbi."

Last Updated ( Tuesday, 20 December 2011 )

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