Today marks a historic day in Canada-China trade relations, as the first renminbi (RMB) hub in the Americas opened in Canada, an event that should promote more Canadian businesses to trade in the Chinese currency.
In late 2013 the Chinese currency overtook the Euro as the second most used currency in trade finance, with the U.S. dollar holding first place. In fact, the RMB has been one of the most stable global currencies since the global financial crisis, making it very desirable for foreign investors.
What are the implications for Canadian companies? Here are 4 things Canadian companies need to know about the RMB hub.
1. More trade with China
Currently, China is Canada’s second largest trading partner, with exports to the country totaling over $77 billion in 2014. The RMB hub is expected to boost those exports by making transactions more efficient and easier for Chinese buyers. In fact, it’s estimated that the hub will create more than $30 billion in direct trade benefits.
“Enabling Chinese buyers to pay for their imports in RMB should bring immediate benefits for Canadian companies, particularly SMEs,” said Gregory Chin, Professor of Political Economy, York University. “It should lead to increased trade volumes, as well as the longer-term benefits of building stronger trade and business partnerships between our two countries.”
2. Cost and time savings
When payment is denominated in USD, transactions are slower, more complicated and more expensive. For Canadian exporters, RMB denominated trade finance means that they won’t have to convert to USD or GBP in London or Singapore RMB hubs. This adds a layer of currency costs, both in terms of the actual exchange, but also the inevitable bank or agent fees that come along with doing so.
“For companies buying from China, the ability to pay for their Chinese imports in RMB can bring cost savings,” says Chin. “If a Canadian company is willing to receive payment for their exports in RMB it can create opportunities for their corporate treasuries to diversify their foreign currency and financial holdings, for managing their foreign risks.” (Transactions will continue to be routed through a third currency until another agreement is negotiated, and CAD and the RMB can trade directly.)
3. Competitive advantage for Canadian companies
There are already a number of RMB hubs around the world, but this first hub in the Americas gives Canadian companies an advantage over their U.S. counterparts. As Canadian financial institutions become more comfortable with RMB deals, trade with China should become more efficient and give Canadian companies a leg up in the bidding process.
“With the ability to deal in RMB, Canadian companies will be on par with those in other hub trading areas such as Australia, Germany and the UK,” says Daniel Koldyk, a senior researcher with EDC Economics. “Our competitors are already testing the waters with innovative RMB solutions. Canadian companies need to make sure they are able to keep pace.”
4. Benefits to commodity sectors
The majority of Canada’s global exports to China are commodities, such as metals and agriculture. The growth of the Chinese middle class has helped increased demand in these sectors, as these consumers with higher disposable incomes look to buy more luxury items. The ability to trade in RMB should lead to better profit margins to Canadian suppliers in these sectors.
“The growth of offshore RMB business in Canada also presents opportunities to develop new lines of RMB-related products and trading for Canadian equities, commodities and futures markets,” said Chin.
Given the growth potential of China, Export Development Canada (EDC) is helping to open some future doors by issuing its third RMB bond in March 2015, for a value of RMB one billion. Read more
To learn more about opportunities for Canadian business in China click here.