An interview with Eberhard Brodhage, GM of Commerzbank AG in Hong Kong
What does the internationalisation of the RMB mean to the German Mittelstand doing business here in China?
Every company doing business in or with China will have to deal with the RMB. The opportunity to settle trade in the currency of your ultimate customer, or potentially use RMB proceeds to cover the cost of running offices inside China eliminates the need to hedge against currency fluctuations. You can achieve natural built in hedges, and if you do transactions in just one currency, it simply is more efficient. That has been shown in the Single European Payments Area â€“ known as SEPA – where national currencies were replaced by the euro.
The same would apply for companies that sell into China and source from China â€“ settling in RMB means that they donâ€™t need to hedge in a multitude of currencies. And we have seen that companies paying in RMB can extract price advantages from Chinese exporters that may have less experience in dealing with foreign exchange risks.
What should such companies do?
Our advice to companies that deal with China is to familiarise with this new currency that has by now firmly arrived on the global scene. Companies should be smart and consider doing business in the currency of the country they do business with, rather than another countryâ€™s currency that may be exposed to volatility unrelated to the Chinese economy.
A lot of Asian companies are faster to adopt RMB compared with their European and American counterparts. So you may also find in your dealings with other Asian countries that changing to the RMB will have a positive impact on doing business. In the future we expect Asian currencies to exhibit higher correlations with RMB than other currencies, increasing demand for using RMB to settle intra-Asian trade.
And what risks do you see for companies?
I donâ€™t see a risk as such by adopting the RMB or CNH – the offshore RMB – as a currency in which you conduct business transactions, be it payments, deposits or loans. It is a new currency that you need to build into your enterprise and planning systems, and maybe this will raise one or the other operational issue. It is a new currency that you need to build into your enterprise and planning systems, and maybe this will raise one or the other operational issue. Experience tells us that companies can easily find solutions to the operational issues that might be faced in the early days of adoption.
There is a conceptual risk should China for some reason choose to reverse the reforms to date. However, this would be extremely damaging for Chinaâ€™s reputation making it more difficult to integrate into global capital markets at a later date. Basically, we think there is no turning back for China in its currency reforms.
Where will the RMB be at the end of 2013?
If we look back at the RMB over a longer time and given the continued strong performance of the Chinese economy, we see a story of continuous appreciation. We are slightly on the bullish side of consensus, forecast USD-CNY at 5.95 by year end. The PBoC is likely to widen the trading band during the year to encourage two-way risk in the currency.
What are some recent changes to the use of RMB?
We see a continuing stream of regulations released by the authorities in China. It is now easier for companies on both sides of the border, off-shore and on-shore, to use the RMB not only for payments but also for corporate finance and treasury management purposes.
One example: so far, the only way to get RMB out of China was to declare a profit, pay taxes on it, and repatriate via a dividend. Recently, there was the highly publicised case of Danone, a French multinational foodproducts company: Danone was allowed to use surplus cash from its China operations to lend to its regional holding and group treasury. RMB was actually transferred across the border, via an intra-company loan to one of Danoneâ€™s offshore entities. So we had an outflow of RMB in the form of an intracompany loan transaction with a maturity of one year or less.
What is the future direction of the RMB becoming an international reserve currency?
I believe in order to make it an international reserve currency, there needs to be a larger stock of RMB held physically outside China. The internationalisation of RMB will develop more quickly in Asia than in other parts of the world. If you look the agreements that were struck with for example with Korea, Thailand, Pakistan, Malaysia or Singapore bilateral currency swap agreements between the Peoplesâ€™ Bank fo China and the countriesâ€™ central banks facilitating trade and investment â€“ you can see that this development is very well underway.
On the other hand, the RMB is not likely to replace the USD as the largest global reserve currency anytime soon. If you look at the euro, it also had a very slow start before it became a reserve currency. I believe that the RMB will take a similar development.
When will the Chinese Capital Account be fully liberalised?
It is impossible to accurately predict the precise timing of capital account liberalisation. It is however a clear goal of the government and the PBoC to move towards an open capital account. Our general view is that capital account will be basically open within five years, with most cross-border flows relaxed in that time frame with some restrictions remaining in place.
We will wake up on morning and realise that the Chinese Capital Account is fully open. As it has happened in other dimension with China, the Chinese currency will also arrive on the global scene – that is beyond reasonable doubt. We think the government will be opportunistic and flexible and we simply advise companies to be prepared for more rapid change than is generally expected. As a bank we will help explain to our clients the various reforms as they unfold and their implications.
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