Doing business in China has always been an exercise in multiple currency conversions. To buy and sell from the Chinese, companies have historically had to convert money between U.S. dollars, China’s currency – called the renmimbi – and their own country’s currency.
In recent years, however, the Chinese government has moved to internationalize the renmimbi – commonly referred to as RMB, yuan or redback. This means the renmimbi – which has emerged as the fifth most-used currency for global payments – can now be used to settle accounts in international trade, as well as in financial investment and currency reserve management.
With the launch in Ontario earlier this year of the first yuan trading hub in North America, doing business in China has become easier for Canadian companies.
“This gives Canadian businesses a greater ability to manage costs,” says Linda Seymour, executive vice president and country head of commercial banking at HSBC Bank Canada, which offers RMB market and banking services.
Having access to a renmimbi trading centre allows Canadian businesses to negotiate deals with Chinese customers and suppliers in RMB, which removes the risks associated with foreign exchange fluctuations. In the past, most contracts would be based on U.S. dollars – a less-than-ideal situation for Canadian companies as well as their Chinese trading partners and suppliers.
Beyond saving on currency conversion costs, the removal of foreign exchange risk could also improve Canadian companies’ ability to command better pricing from their customers and suppliers, says Ms. Seymour.
“Once you’ve removed the unknown – the unpredictability of the foreign exchange market – then the negotiating parties have a better handle on their costs and may be able to pass on some savings,” says Ms. Seymour. “Canadian companies can potentially save on the costs of their contracts.”
Having a renmimbi hub right in their own backyard will likely encourage more Canadian companies to use the Chinese currency for trade settlement with mainland China. A survey conducted earlier this year by HSBC found only three per cent of Canadian businesses had completed cross-border transactions in renmimbi. By comparison, 17 per cent of global companies and 10 per cent of U.S. companies surveyed said they used the RMB in their deals with China.
The HSBC survey – which polled more than 1,600 decision-makers from Australia, Brazil, Canada, mainland China, France, Germany, Hong Kong, Malaysia, Singapore, South Korea, Taiwan, the UAE, the U.K. and the U.S. – also found more than 60 per cent of Canadian respondents expect to increase their cross-border trade with China over the year. Yet just over 20 per cent of Canadian firms not using the RMB today plan to use it in future dealings with China.
“If you’re looking at China as a trading partner or already doing business in China, it’s critical that you start thinking of using the renmimbi in your transactions,” says Ms. Seymour. “China is the world’s largest trading nation; embracing the renmimbi will help to increase trade flows between China and Canada and allow us to diversify our trading activities beyond the historic U.S.- Canada trade corridor.”
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