Canada and China are cutting out the American middleman, a move that could boost trade and make it easier to do businesses between the two countries. Stephen Harper’s China junket has finally yielded a much-anticipated reciprocal currency deal, which will allow the Canadian dollar and the Chinese renminbi (also known as the yuan or “redback”) to be traded directly. The agreement paves the way for the establishment of a renminbi trading hub on Canadian soil, the first of its kind in North America.
Jason Henderson of HSBC Canada believes the deal is vital for the continued health of the Canadian economy:
China is the second largest economy in the world and is growing faster than any of the world’s large economies, so if Canada is going to maintain the standard of living that we have today, we need to tap into that economy. It’s important for Canada and it’s a great symbol for Harper to have gone to China to strike this deal; it means we support the internationalization of China’s capital markets and recognize its importance to Canada.
Canadian businesses operating in China are currently required to make U.S. dollar-denominated transactions, a costly system thanks to a volatile exchange rate. An HSBC study earlier this year also found that more than half of Chinese businesses would be willing to give their trade partners up to a 5% discount if they denominated deals in yuan.
A renminbi trading hub would remove some of the logistical difficulties and legal intricacies faced by Canadian firms looking to operate using the local Chinese currency. Such a trading centre requires the approval of the Chinese government, which Harper’s visit to the country appears to have secured.
The location and specifics of the Canadian renminbi trading hub have not been announced, but the Toronto Financial Services Alliance has been pushing for the currency exchange centre to be located in the country’s commercial capital. Another realistic alternative would be Vancouver:
Vancouver is the logical place to host a renminbi hub in Canada. The city has a large Chinese-speaking population and has long been regarded as a gateway to the Pacific. With no offshore hubs yet established in North America, a Vancouver centre could attract a sizeable chunk of the international yuan market, which currently mostly runs through Hong Kong.
On another economic front, Harper’s visit has proved less fruitful. The Canadian Prime Minister has diligently side-stepped Chinese requests to begin discussions about a free-trade agreement. Canada recently signed a similar deal with South Korea, and the long-running negotiations around an EU agreement are wrapping up. But the Conservative government’s moves to restrict Chinese investment in the oilsands and the hiking of tariffs on Chinese goods have strained relations, and the complex negotiations that a free trade agreement would require mean a deal is a long way off.
Businesses need not wait for a free trade deal to explore the Chinese market. Corporate Canada has failed to follow economic growth in the country, largely restricting itself to the coast and traditional urban centres and ignoring the huge opportunities afforded by rapidly-developing inland provinces. With expanded logistical infrastructure, a booming middle class, and an increasingly sophisticated economy, China is still an incredibly attractive market for firms looking to grow their overseas exposure.
Once a Canadian renminbi trading hub is up and running, expect to see more of the country’s businesses filling their tills with redbacks.