Earlier this year, an international bank found that Canadian businesses came in last among those in 11 countries for trading in renmnibi, the Chinese currency variously known as RMB, the yuan and the “redback.” This despite the fact that nearly half of Chinese companies—exporters and importers—declared that they would allow discounts of 0.7% to 5% to foreign firms that settled trade in RMB.
Now a recent report by the respected Asia Pacific Foundation of Canada, has found that Canadian exporters ill understand the advantages of billing RMB, rather than their traditional habit of billing in U.S. dollars. Every time you need to trade through a currency (Canadian dollars to U.S. dollars to RMB) it costs you and/or your customer money. And while it is becoming increasingly easy to trade in RMB, only 5% of Canadian companies settle transactions with China that way.
That where RMB-trading hubs could come to the rescue. Both Vancouver and Toronto have lobbied to become joint trading hubs for RMB. Already, there are hubs set up in Hong Kong, Singapore, London and Frankfurt. But so far, no city in the Americas has stepped forward to form a centre. The two cities have been encouraging the federal Department of Finance to work with Chinese counterparts on allowing them to become the first hubs in the western hemisphere.
How would an RMB trading hub benefit your business and why do they matter? Last year, Canada’s merchandise exports to China rose to a healthy $20.48 billion. But settlement required three currencies to complete. Imagine, the Asia Pacific Foundation writes, the enormous savings if exporters could settle in just loonies and RMB. That would require an offshore RMB settlement hub in Canada, a prospect that the Chinese government and its banks would welcome.
The cost to you in hedging foreign-exchange risk is cheaper overseas than inside China. And if Chinese companies are willing give discounts to Canadians willing to trade in RMB, you can gain a real competitive advantage over other firms that still plod through CAD to USD trades and then USD to RMB currency trades. Indeed, the Asia Pacific Foundation says using RMB to settle China business could increase Canada’s trade by $500 million a year.
And if your business is involved in selling financial software or does trade clearance activities, a Canadian overseas settlement hub will boost business as Canada is seen to be the most important RMB centre in the hemisphere. Still there are two impediments to proceeding. One is explaining why (other than traditional regional rivalry) two cities thousands of kilometers apart should jointly act as a hub. The actual hub is virtual mostly relies on back office support to run it. The other impediment is getting Canadian banks to start offering services and financial instruments denominated in RMB. Although they are working on this, they will have to convince Ottawa that there is sufficient support to warrant a settlement hub here.
If it goes ahead, you can expect to see your trading costs with China drop. And it isn’t necessary to wait for a settlement hub to open. Between 2012 and 2013 Canadian companies settling in RMB rose by 50% to 0.2% of total transactions. It was a good start, but considering that 20% of transactions made by your foreign competitors worldwide was in RMB, Canadian need to get moving, and fast.