Mark Emmerson of HSBC Europe -
The recent shifts in global trade patterns are well documented, with European businesses seeing an ongoing fundamental shift not only in who we trade with, but also how we trade. Socio-economic, political and technological changes have all contributed to opening up the global marketplace to Europe and they have left us in an unprecedented position - we can see the prizes up for grabs, but we are not necessarily best placed to seize them.
Nowhere have these opportunities been better recognised than within the Chinese market. China's economy grew at an average rate of 10% per year during the period 1990-2004, the highest growth rate in the world, and in that time it has gone from being a closed market to one of the key pillars of the global economy. According to HSBC's recent Trade Confidence Index, China will retain its position as the key axis for global trade, with traders across the globe regarding Greater China as the most promising region for growth over the next six months.
Other statistics underline this truth - by 2050, 19 of the 30 largest economies will be the so called "emerging economies" (HSBC: 'The World in 2050"), with HSBC predicting that China will be the world's largest economy by 2020.
For Europe, this change is having a real impact both in where order books are heading and also in how the new economies of Europe are emerging. Increased levels of investment and trade opportunities from China are influencing how countries such as Poland, Turkey and the Czech Republic are trading. As these countries look at how to capitalise on growth opportunities and identify where their best chances of economic success lie, they are not necessarily looking to the established European economies of Germany, France and the UK. China and India are identified as equally important as these established economies- in some cases they are believed to be more important, critical to countries' future growth and success. Increasingly, CEOs no longer only see China as a foreign direct investment destination - according to the National Bureau of Statistics in China, it is now the 5th largest overseas direct investment origin.
Central to both these developments is the internationalisation of the Chinese currency, the renminbi, or more commonly called the yuan. HSBC forecasts that by 2015 over half of Chinese trade with emerging markets (approximately $2 trillion) will be settled in renminbi and it will become a top three international currency if it becomes fully convertible, with Asia and the emerging markets leading renminbi trade and investment.
The opening up of the Chinese economy offers a new, real alternative for currency settlements. Historically, with the renminbi as a restricted currency, companies would have to change renminbi back into US dollars or euros when settling trades outside of China. This extra bureaucracy increased complexity, cost and risk.
In identifying internationalisation of the renminbi as a key priority for the country's continued economic growth, China is enabling corporations in both China and its major trade partners to use renminbi instead of non-local currencies, such as the euro or dollar, for settling cross-border trade. Fewer currency changes, and a perceived strength of the renminbi as the Chinese economy continues to grow, make the renminbi a real option for traders and bankers, with little indication that it will lose its appeal as China continues to consolidate its prime position in global trade.
For businesses day to day, the deregulation of the renminbi also means companies can hold the proceeds of trade settlements in renminbi, achieving both a natural currency hedge for businesses that have existing receivables or payables already in renminbi and a diversification of offshore currency holdings.
Recent HSBC "Doing Business in China" events held in Poland and Turkey have highlighted how there is a real appetite from businesses of all sizes to adapt and exploit the renminbi as a working currency to drive growth opportunities. Indeed, HSBC has settled renminbi transactions - the first in each market - in Turkey, Poland and the Czech Republic, with local businesses using renminbi as a way of maximising the potential of their products and services. HSBC now offers RMB settlement facilities in more than 40 countries across six continents.
In everyday terms, working in renminbi will help strengthen importers' positions when negotiating contract terms and pricing, while exporters will also benefit, broadening their customer base by accepting renminbi as a settlement currency and reducing the risks of exchange rate fluctuations. Where both the vendor and purchaser settle in renminbi, both businesses will benefit from reduced costs and transaction times.
Renminbi settlements are a practical, accessible step to enhancing prospects for international growth, offering benefits to both customer and supplier while reducing risk and transaction costs.
For businesses in the European emerging markets, the question is not whether the renminbi is worth considering, but whether you can afford not to.
Mark Emmerson is Head of Trade and Supply Chain at HSBC Europe
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