Why the RMB Hub Matters

Why the RMB Hub Matters

Meet Dan Koldyk. Dan is a Senior Research Analyst at Export Development Canada (EDC), specializing Chinese economics and Canada-China trade. Dan spent 12 years working on the Canadian foreign ministry’s China desk, where he was the lead author of a Government of Canada engagement strategy for China. ExportWise spoke with Dan about the impact the new Canadian Renminbi (RMB) Hub will have on Canadian Trade with China.

What are the advantages of the RMB hub?

The Renminbi hub is expected to boost 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 over the next decade. Enabling Chinese buyers to pay for their imports in RMB should bring immediate benefits for Canadian companies, particularly SMEs, and eventually lead to increased trade volumes and stronger trade and business partnerships between our two countries.

Here’s how: 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 European or Asian RMB hubs. This adds a layer of currency costs, both in terms of the actual exchange and the inevitable bank or agent fees that come along with doing so.

What is the biggest misconception about the RMB hub?

The biggest misconception is that there is direct convertibility from CAD to RMB right now, but that is not happening yet. Another agreement will be required for that to happen, and that will be dependent on how much RMB business volumes increase over the next few months. Transactions will continue to be routed through a third currency until another agreement is negotiated, and CAD and the RMB can trade directly. That said, with the volume of trade Canada currently has with China, direct conversion could happen within the next six to 12 months, if not sooner. Regardless, in the short term the RMB hub will allow transactions between CAD and RMB to happen more efficiently and reduce the cost of currency exchanges.

Why is this so important to Canadian business?

A lot of Canada’s trade with China is in commodities. The challenge with selling to China is that they can get commodities from many different countries, not just Canada. So if Australia is selling Grade A wheat and Canada is selling Grade A wheat, but the Australians will transact in RMB, then where will the Chinese buyer go? This hub will give Canadian companies more flexibility and a competitive edge that wasn’t there before.

Will this help Canadian companies expand in the Chinese market?

Definitely. Prior to the hub, Chinese SMEs needed USD liquidity in order to trade with Canada, and accessing foreign exchange in China is not a simple process. For many, it is downright frustrating. An individual in China, for instance, can only convert 50 000 USD per year. Chinese SMEs have more bandwith, but they still need to go through foreign exchange agents who enforce strict conversion quotas. This will continue to be a significant hurdle.

For example if a Canadian company has a million dollar contract with a Chinese buyer, it could take up to 20 business days for the buyer to convert the funds. That’s a big bottleneck. Letters of credit denominated in USD also have important restrictions. Now, Canadians can conduct business in RMB, which makes the payment process much easier, not to mention cost effective. It also makes life simple for the buyer. Simply put, by accepting payment in RMB, Canadian exporters make themselves more attractive to Chinese buyers and have the potential to attract more Chinese clients.

Any other advantages?

If a Canadian company takes payment in RMB, their product is more attractive to the buyer; they’ve just sweetened the deal. The RMB is also a stable currency; so not too much risk. It depreciated for the first time ever against the US dollar in 2014 (across a 12 month span), but only by 2.4 per cent. It actually did well against the CAD and most other major currencies. And this fluctuation was a good thing as it increased the demand among Chinese buyers to purchase in RMB. At the end of the day, the hub makes payment terms easier, the Canadian company gets paid faster, and there’s less frustration for Chinese buyers… all of which is good for business.

And don’t forget that China is the world’s largest trader and the second largest economy, so the global demand for the RMB is ready to take-off.

See also: 4 Things You Should Know About the New Renminbi Hub

Categories Asia & Pacific
  • Pingback: Why the RMB Hub Matters - ExportWise | Canadian...()

  • O Canada

    But if I collect 1M in RMB for the sale, and have to pay my suppliers in CAD I still lose a bit more than I should
    on the Forex as CAD does not trade directly with RMB yet, correct?

  • Daniel Koldyk

    You should not lose anything on the transaction. If you take payment in RMB, the contract price needs to increase. When a transaction is denominated in US dollars, the Chinese side is already factoring in foreign exchange fees, foreign exchange risk, and other premiums into the price they are willing to pay. When the Canadian side agrees to take payment in RMB, they are removing these fees from the Chinese side’s cost structure. This means that the Canadian side now needs to include these costs into the price they are willing to accept.

    Example: If you were being paid the equivalent of $100 for the sale of a widget when the deal was denominated in US dollars, you should now be paid >$100 for the sale when payment is made in RMB. For the most part, the increase in the contract price will be determined by the fees you pay for foreign exchange conversion and foreign exchange risk. Depending on the deal, there can be other factors that influence pricing. And don’t forget that by accepting payment in RMB, you can make life a lot easier for the buyer and expand the universe of potential customers.

Related Posts