On November 8, the Bank of Canada and the People’s Bank of China announced a memorandum of understanding to support two-way trade and investment denominated in renminbi (RMB). A few days later, Industrial and Commercial Bank of China was selected to be the RMB clearing bank in Canada. And, on November 17, the highly-anticipated Shanghai-Hong Kong Stock Connect was officially launched, allowing investors inside and outside of Mainland China to trade and settle shares directly in the others’ market.
These initiatives, individually and collectively, are part of a long-term journey as international use of the RMB has grown rapidly since Chinese authorities began reforms at the end of the last decade. The RMB is now used to settle around 18% of China’s total trade—up from just 3% in 2010, according to HSBC Global Research.
Why does this matter to Canadians and why should we pay attention? Canada’s strong relationship with China includes a century of close cultural ties, with nearly 1.5 million self-identified Chinese and part-Chinese people living in Canada today. Conversely, while Canada’s economic relationship with the U.S. remains vital, China’s continued growth offers new opportunities.
China has become a key growth market for Canadian companies, with exports there expected to grow 11% and imports expected to grow 8% over the next three years. In fact, in 2012, China overtook the UK to become Canada’s second most important trading partner, behind the United States. By contrast, Canada is China’s 21st largest trading partner—not yet reflective of the size of our economy, but certainly leaving ample room for growth.
For example, China’s future energy needs are expected to be significant, and as the world’s sixth-largest oil producer with significant energy reserves, Canadian energy services companies have a clear opportunity to sell their expertise to Chinese energy companies. A burgeoning trade in energy may also open the door to other Canadian companies – including accounting, legal and financial services, logistical and infrastructure firms – to leverage their products and services.
The average Chinese worker’s income will increase sevenfold by the middle of the century, according to our research, creating a vast new market for goods. This means Canadian firms have a window of opportunity to target growing demand in China for raw materials, agriculture, lumber, technology, transportation, biotech and pharmaceuticals.
By electing to settle in RMB, Canadian firms could see financial discounts now that Chinese businesses will no longer have to factor in the cost of foreign exchange risks. Indeed, RMB trading hubs in other areas of the world, such as in Singapore and London, have already seen RMB usage increase. Considering only 5% of Canadian firms say that they have conducted business using the RMB, compared with 17% of U.S. firms and a global average of 22%, Canadian companies have been leaving renminbi on the table.
Considering beyond the immediate benefits of a RMB clearing centre, two additional drivers of increased trade between Canada and China are the recently-ratified Canada-China Foreign Investment Promotion and Protection Agreement (FIPA) and the Renminbi Qualified Institutional Investor Program (RQFII), respectively. Where the former reduces the risks faced by Canadian businesses investing overseas, the latter translates into direct access to China’s capital markets for Canadian institutional investors.
Finally, the recent launch of the Shanghai-Hong Kong Stock Connect marks a new chapter in China’s financial integration with the world, and will, in time, reshape the dynamics of global investment flows. Stock Connect will, for the first time, allow mainland Chinese citizens to invest directly in foreign equities, and give international investors—primarily institutional investors to begin with—direct access to China’s stock market. While the implications of Stock Connect are far-reaching, this initiative effectively confirms the RMB’s status as a global investment currency.
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Our country is playing an active role in shaping financial history and, while the designation of Canada as the first RMB trading hub in the Americas is a significant achievement unto itself, real success should be measured by the ability of Canadian companies and investors to tap into the many and very real opportunities for growth it presents.
Jason Henderson is Head of Global Banking and Markets at HSBC Bank Canada