China’s currency, the renminbi, is continuing its very gradual march toward internationalization. But although China is America’s second largest trading partner after Canada, the U.S. doesn’t seem to be getting on board with RMB internationalization as fast as other nations, as a new survey by HSBC shows.
Only about 10 percent of U.S. businesses reported using the RMB to settle cross border trade, compared with a global average of 17 percent, according to the survey. More U.S. business say they are “investigating the idea” of using the RMB to deal with Chinese partners, though not as many as in other countries. Nearly a fifth of U.S. management teams have discussed using the Chinese currency, roughly similar to companies in Australia, Canada and the UK, but fewer than in Singapore, Malaysia, Germany and the UAE, where about a quarter of teams have done so.
Interesting, small American businesses were more likely to embrace the RMB than large or mid-sized companies. According to HSBC, 12 percent of U.S. small businesses used the renminbi to settle trade in the last year, compared to 9 percent of larger companies – though more than a quarter of large companies say they plan to use RMB in the future.
HSBC's Kevin Quinn attributed the discrepancy to the greater flexibility among small companies, which gives them a first-mover advantage. “Smaller companies are often more entrepreneurial in nature and are looking to take advantage of any potential relationship gains or pricing opportunities available,” he said. “If they like an idea, they can implement it immediately whereas a larger company often needs to work through its processes and organization before implementing change."
Among the Chinese businesses surveyed, 35 percent said they were using the renminbi to settle trade, up from 33 percent in 2014. Six in 10 said they expect the level of their RMB cross-border business to increase in the next year, compared with 44 percent in 2014.
The U.S. is now lagging behind not just in using RMB in trade, but also in setting up a hub for its trade. On Monday, Toronto became the first trading hub and clearinghouse for the Chinese currency in North America, following a similar deal for Australia in 2013. Germany, Hong Kong, London, Luxembourg, Singapore, South Korea, Japan, Switzerland, Taiwan, France, Russia and Malaysia have also set up RMB trading hubs. The step essentially removes a middle man in the conversation of Chinese currency, and gives these countries a small stockpile of RMB to use in purchasing Chinese exports.
In Toronto, the new hub will allow Canadian businesses to pay for imported Chinese material in RMB, rather than other currencies like U.S. dollars. Analysts say the hub will have a positive influence on China-Canada trade and could potentially divert a (small) share of the $550 billion in bilateral trade between China and the U.S. through Canada. It could also be a step toward offering RMB-denominated securities at Canadian financial institutions.
HSBC's survey found that 14 percent of U.S. businesses expect the renminbi to be a fully internationally traded currency like the dollar or euro in the next five years. Though China’s decision-making process for macroeconomic changes is opaque and can be hard to predict, that seems like an ambitious goal.
China still has tight restrictions on where the renminbi can be used internationally: To keep the value of the currency stable, China’s central bank places limits on the amount of currency that both foreigners and Chinese can take in and out of the country. So far, China’s internationalization efforts have mainly been restricted to trade settlement.
However, China’s trade is so substantial that even this use has landed the renminbi among the world’s top 10 most traded currencies. According to data from SWIFT, the renminbi is now the fifth most-used currency for global payments. The RMB's march toward internationalization has been very gradual, but it is moving forward nonetheless.
