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Westpac China report reveals impact of renminbi liberalisation

 

11 November 2014

Westpac Institutional Bank today launched a Special Report on the liberalisation of China’s financial system and the benefits for customers across Asia, Australia and New Zealand as economic ties with China grow closer. Read the full report. (PDF 1MB)

The Chinese Government is rolling out a sequence of reforms designed to increase the use of its currency, the renminbi (RMB) in international trade and investment. Establishing RMB settlement hubs in major financial centres outside of China and reducing restrictions on cross boarder capital flows are focal points of this initiative.

Westpac’s China Report, “Tapping into the Renminbi Opportunity – Trade, Capital and People flows in the Asian century”, delves into the expected benefits and challenges of this as Australia builds stronger links with its largest trading partner.

According to Balaji Swaminathan, General Manager Westpac Asia, the expanded use of the RMB and carefully sequenced opening of China’s capital account will integrate China as a key player in global capital markets and have profound economic implications for its major trading partners such as Australia.

“China’s economic size, diversified trade and high growth economy mean the RMB has the potential to become one of the world’s most widely used currencies by 2020.

“This has broad implications for many of our customers as the RMB becomes a fully convertible, global currency - as important in daily operations and trade flows as the AUD, NZD and USD,” he said.

According to the Report, while China is an established global economic power the country’s economic might has not yet been matched by its global financial integration.

This will not persist in the long run, as the Chinese authorities are committed to a liberalisation process and have already taken a number of important deregulatory and market-oriented steps.


The Report highlights the benefits of this process, including;
1. Simpler and more efficient ways to trade and transact with China from Australian based bank accounts.
 
2. Benefits of invoicing and settling trades in RMB as direct conversion creates savings on both sides of the equation, with reduced foreign exchange risk and the potential to negotiate discounts and better settlement terms. As long as the US dollar remains the trade currency of choice, many transactions will continue to require a three way conversion, from RMB to US dollars to Australian dollars with a loss of basis points at each conversion point.
 
3. Access to China’s debt and equity capital markets for Australian investors.
 
4. Australia’s sophisticated funds management industry will benefit as an alternative destination for investment of Chinese household savings.

 

The tip of the iceberg
Huw McKay, Westpac’s Senior International Economist believes that China’s tightly controlled capital account has artificially restricted China’s share of international financial transactions, which are trivial when compared with its slice of the real economy.
“Today, China accounts for around 16% of world GDP but its share of private capital flows are a mere fraction of that. But as barriers to capital movement are progressively lifted, this anomaly will be corrected.
“China’s geographic share of global foreign exchange transactions could rise from a meagre 0.4% in 2010 to 15% by 2030.
“However, trade related flows alone will not be enough to achieve this outcome. Diversified cross holdings of Chinese assets abroad and foreign assets in China must develop if these projections are to be reached,” he said.

 

Challenges to overcome
Westpac’s China Report highlights that while many corporates may be aware that there could be benefits available from direct RMB payments, for a number of reasons, these are not being captured.

The RMB is the second most used currency in trade finance, but at present very few Australian businesses actually invoice and settle trades in RMB.

Westpac anticipates that momentum in Australia will follow a similar accent as other offshore RMB settlement hubs around the world such as Singapore and London, as larger pools of liquidity, trade and transactional flows have encouraged confidence and further market activity.
Until this happens, Australia isn’t necessarily going to see advantages of direct transactions with the renminbi straight away.

Years of familiarity dealing with the US dollar are unlikely to be replaced overnight. Many businesses prefer the certainty of the familiar over the promises of the new. Others may be uncertain about their ability to negotiate discounts and settlement terms to reduce operating costs – with flow-on effects to working capital management.

In response to these dynamics, Balaji Swaminathan said that although our customers may not consider direct dealings in RMB imperative yet, it is central to our Asia strategy to support them as they navigate this change that is likely to take place in the medium term as new opportunities emerge.
“Establishing deeper financial and trading relationships with China is not without its challenges however it will be enviable as China continues to liberalise its financial market.

“From Westpac’s point of view, sitting on the sidelines and observing the transformation in China is not an option. Now is the time to help our customers understand the current state of play and look for ways to grow their business through China’s more accommodative markets and freely traded currency,” he said.