HSBC bets on renminbi

MANILA, Philippines - The Hongkong and Shanghai Banking Corp. (HSBC) said that the recent move of the International Monetary Fund (IMF) to include the renminbi into the special drawing rights (SDR), is a reminder for companies across the world that the Chinese currency  needs to be part of their business strategy.

According to Vina Cheung, HSBC Global head of RMB International, said that the recent inclusion of the renminbi into the SDR, an IMF reserve asset, is a major milestone in China’s mission to globalize its currency.

“The decision has been a long time coming, and has effectively granted the status of global reserve currency on to the renminbi,” Cheung said in a report.

The IMF move primarily interests central bankers, seeking solutions to reallocate their reserves to match more closely the basket of currencies that makes the SDR.

The renminbi’s newfound status as a reserve asset is going to, over the medium term, boost demand for the currency among central banks. A recent Bloomberg poll of reserve managers gave a median prediction that 10 percent of global foreign exchange reserves will be held in the Chinese currency by 2025.

There is currently $7.8 trillion worth of reserves globally outside of China. HSBC estimates that it would require nearly $800 billion to go into renminbi-denominated assets.

China’s capital outflows are growing rapidly, as local investors diversify into foreign assets.

Outbound investment by businesses and individuals is expected to generate $1.5 trillion worth of outflows by 2020.

Cheung said that any company that does business with China should take note of this upcoming chain of events, as movements in the renminbi are set to become a consideration that cannot be ignored.

“A manufacturer, for example, that sources some of its parts from China may well be mostly focused on the exchange rate, which could influence the cost of some of its components. A foreign firm that is investing in China while directly trading with local customers, will need a more advanced currency strategy which not only takes into account the value of the renminbi, but also the liquidity conditions to ensure that it can get hold of enough cash to meet its obligations,” the HSBC renminbi specialist said.

As the world’s second largest economy, it has a huge influence on everything from the health of emerging markets to the price of commodities.

A significant shift in the outlook for the renminbi could therefore have a substantial impact on financial markets, trade flows, and even international relations.

Every business needs to find an approach that fits its circumstances.

But what’s clear is that despite encouraging signs that companies want to do more business with China, many firms are missing out on the chance to get ahead of their rivals by including the renminbi into their business planning.

According to HSBC’s RMB survey this year, only 22 percent businesses are using the currency to settle trade.

The trend though, is clear – the renminbi is on track to enter the top tier of global currencies, and the IMF’s SDR decision is only the latest reminder. The imperative for businesses the world over it is to make the currency a key part of their foreign exchange considerations.