The internationalization of the Renminbi (RMB) has experienced remarkable growth in the past few years. Offshore RMB centers have been established in various cities like Hong Kong, Singapore and London. Whilst Frankfurt is in the process of establishing the first European continental RMB offshore center. That growth has been helped by the Shanghai Free Trade Zone (FTZ) which has launched a series of policies to promote the internationalization of the RMB.
The RMB has a vital role to play in trading with or investing in China. The question to be answered is what benefits will RMB internationalization bring to European investors?
Trade settlement - The RMB is widely used in cross-border transactions with China. According to the global transaction services organization (“SWIFT”), the RMB has overtaken the Euro, becoming the second-most used currency in traditional trade finance transactions with China. It is the 8th most used payment currency in the world.
The internationalization of the RMB allows foreign companies trading with mainland Chinese companies to settle the trade in RMB, thus reducing forex transaction costs. In addition, they are often able to secure better terms and improved margins if the trade is settled in RMB. Settlement in RMB can also increase the overall size of the trade as more small and medium Chinese companies will make cross-border trade if they are allowed to make settlement in RMB.
If a European company is designated a FTZ member entity the company can receive and make current account payments of cross-border RMB on behalf of related parties on a central basis. In this way, the FTZ member entity may centralize their payment systems and face less FX risks and settlement fees.
RMB financing and borrowing - RMB denominated bonds, also called Dim Sum bonds or offshore RMB bonds, are issued in Hong Kong, Luxembourg and Singapore. The RMB raised through the issuance of Dim Sum bonds can be transferred back into Mainland China through intercompany shareholder loans or capital injections subject to approval from the Chinese Ministry of Commerce (MOFCOM). Dim Sum bonds offer international issuers the chance to access a competitive funding source and the ability to diversify their financing portfolio.
Capital management - FTZ member entities may borrow RMB funds directly from overseas financial institutions without foreign exchange control, though subject to certain quota and restrictions. This allows multinational companies to centrally manage their RMB funds and make payments directly in RMB globally through a FTZ member entity who holds a RMB dedicated deposit account for the group. That entity can undertake cross-border two-way RMB cash pooling. This can also help diversify their assets and protect against depreciation of any one currency.
Banking area - European banks can benefit from RMB settlement and clearance.
Optional investment opportunities - European investors have alternative investment choices and benefit from the appreciation of RMB in the long term.