Trade flows

Full speed on the renminbi superhighway

Cross-border transactions in and out of China just got a lot easier and here is why

As Sibos – the major annual banking conference organised by SWIFT – gets underway in Singapore, one topic bound to dominate discussions is the rise of the renminbi (RMB), which is rapidly transforming the global financial landscape.

Last week’s launch of the new Cross-Border Interbank Payment System (CIPS) is the latest major landmark on the RMB’s path to internationalisation, a journey that will one day culminate in the Chinese currency being used as freely as the US dollar.

CIPS creates a superhighway for RMB payments, making cross-border transactions into and out of China much more efficient for financial institutions and corporates. IKEA was one of the first major corporates to benefit, as Standard Chartered successfully completed an RMB transaction from China to Luxembourg for the company last week.

CIPS is a gamechanger and its power should not be underestimated.

In the past three years alone, the RMB has overtaken seven countries in SWIFT’s currency rankings

The international use of the RMB still does not reflect China’s status as the world’s second-largest economy. The US dollar takes the lion’s share of payments by value (44.82 per cent), while the RMB has passed the yen in fourth place (2.79 per cent), according to SWIFT.

However, given the size of China’s economy and its status as a global trading partner, it is inevitable that the RMB will become a global currency. RMB payments have been steadily increasing since China began to lift restrictions on cross-border payments. In the past three years alone, the RMB has overtaken seven countries in SWIFT’s currency rankings.

Market-led devaluation

As for the doom mongers who predict that the RMB’s internationalisation will stumble because of the recent volatility in the stock market and US dollar-RMB exchange rate, we disagree.

In August 2015, the People’s Bank of China (PBoC) announced it was changing the way the RMB-US dollar reference rate is calculated, making it subject to market rates and the previous day’s close. The move resulted in devaluation of the RMB, which was led by market forces.

The launch of CIPS provides the infrastructure essential to support the growth in the international RMB payment traffic

Greater volatility in the trading of the RMB makes it more akin to liberalised currencies. It also creates more urgency for hedging currency exposures, and thus increases RMB foreign exchange settlement flows. Meanwhile, the foreign exchange risk will prompt corporates to use RMB to settle their trade with China. For many, it will be more effective to centrally manage the US dollar-RMB foreign exchange risk offshore and hedge the exposure at optimal rates, given now it’s possible for corporates outside of China to access both onshore and offshore foreign exchange markets.

Liberalisation encourages RMB use

The change made by the PBoC has also been viewed as a measure that is necessary for the RMB to be considered for inclusion in the International Monetary Fund’s (IMF’s) basket of special drawing rights (SDR) currencies later this year – a move which could significantly boost the RMB’s fortunes.

The liberalisation of China will continue to encourage international use of RMB for trade or investment. The launch of CIPS provides the infrastructure essential to support the growth in the international RMB payment traffic.

For the delegates from banks and businesses attending this week’s Sibos in Singapore it is likely to prove a major milestone.

This article is co-authored by Stephen Street, Executive Director, Correspondent Banking, Transaction Banking, Standard Chartered 

Read more insights from Sibos here