Cashing in big on yuan trade

Daniel Sin

Like any Hong Kong businessman involved in mainland trade, Edward Tsui Ping-kwong has one thing high on his wish list: the ability to settle transactions in the national currency. Locked into complicated multicurrency transactions and vulnerable to fluctuations in the relative value of the yuan and other units, people like Mr Tsui would like nothing better than to be able to do all their trade in yuan.

So Mr Tsui, his fellow businesspeople and Hong Kong's financiers are eagerly awaiting the details of a trial scheme that will allow the city's cross-border traders for the first time to settle transactions in yuan.

While the scheme is initially likely to be subject to strict limitations on who can benefit and where, the response among government officials, businesspeople and academics has been positive, as they eye the sizeable business opportunities it promises.

At present, cross-border trade transactions are mostly settled in a foreign currency, such as the US dollar.

Stanley Wong Yuen-fai, director and deputy general manager of the Industrial and Commercial Bank of China, said that when a Hong Kong importer concluded a trade contract with a mainland supplier, he would ask his bank in Hong Kong to issue a letter of credit - the bank's undertaking to pay the supplier when the latter's contract obligations were met.

The letter of credit would be forwarded to the supplier's bank, which, in turn, would inform the supplier to deliver the merchandise. Upon consignment of the goods, the supplier would produce documentary proof to his bank to receive payment, in the specified foreign currency.

In issuing a letter of credit, the bank may receive a deposit from the importer, together with a fee equal to a certain percentage of the deposit. The bank may sometimes offer a credit line for the importer as an additional service.

Mr Tsui, an executive committee member of the Chinese Manufacturers' Association who owns a factory in Guangdong, said his trade with overseas buyers was transacted in US dollars, while he had to pay all local expenses in yuan. When the yuan's value rose, the value of the US dollar fell. To reflect the change in the exchange rate, buyers should, in principle, pay a higher price for the merchandise. But to stay competitive, most manufacturers would not demand a price increase but would absorb the loss as a manufacturing cost.

'If we can settle trade transactions in renminbi with overseas buyers, we can use renminbi in our quotations, and require buyers to pay in renminbi. This would make our business more stable and we would not have to convert the income to renminbi to pay local expenses,' he said.

Mr Tsui said it was not feasible to use the yuan in trade transactions in Hong Kong without a change in mainland foreign-exchange controls.

'For example, even if you have a personal renminbi account, you cannot withdraw a million yuan and move it [between the mainland and Hong Kong]. The most you can move each time is 80,000 yuan [HK$90,850]. Even in a year's time, you cannot move all the 1 million yuan. But during that time, the exchange rate might have changed more than 10 per cent, and you may incur a considerable loss.'

Renminbi business in Hong Kong was officially launched in February 2004, with five types of banking services available: deposit taking, currency exchange, remittance, debit and credit cards, and personal cheques.

By the end of January this year, yuan deposits held in Hong Kong's banks amounted to more than HK$54 billion. By contrast, last year, total merchandise trade between Hong Kong and the mainland amounted to more than HK$2.78 trillion, and Hong Kong dollar deposits were worth more than HK$2.74 trillion.

But a customer cannot change more than 20,000 yuan in each transaction, and cannot remit more than 80,000 yuan a day.

Things are changing, however. Last December, the State Council announced its support for the development of renminbi business in Hong Kong and agreed to expand the currency's scale of settlement in trades between China and neighbouring nations. Premier Wen Jiabao said last month that yuan trade settlement would be implemented in Hong Kong pending final State Council approval.

The new policy is seen as more central government support for Hong Kong to tackle the financial crisis and a positive response to the Hong Kong Monetary Authority's lobbying efforts.

A spokesman for the Monetary Authority explained the significance of the policy.

'It is a first trial for the use of renminbi to settle trade transactions through the banking system outside mainland China, and it is also an experiment that would promote the use of renminbi outside mainland China,' he said.

'With this new business, the capabilities of Hong Kong's financial system in handling renminbi-denominated transactions will be strengthened, thereby enhancing the status of Hong Kong as an international financial centre. The use of renminbi can enhance the transparency of pricing of goods, thereby facilitating trade between the mainland and Hong Kong.'

While details are yet to be announced, Mr Wong said these would be more than just replacing US currency with renminbi in the current trade-settlement process. 'In the experimental stage, the scale of trade transactions settlement in renminbi would likely be small, as only designated cities and selected firms with proven track records could participate.'

Mr Wong added that it was unlikely at this stage that banks would be allowed to offer yuan credits to customers to conduct trade transactions.

As more experience was gained, Mr Wong said, more cities and more companies might be permitted to participate, and in the long term, a renminbi clearing bank might even be unnecessary.

But he said that unless banks were allowed to provide yuan credits or trade financing services and other value-added services, a service in just renminbi trade transaction settlements was not profitable.

Francis Lui Ting-ming, professor of economics at the University of Science and Technology, said an increase in the use of the yuan in international trade would offer good business potential for Hong Kong's financial market.

'Currently, China's gross domestic product is worth about 30 trillion yuan and the nation's total exports last year were valued at about a third of GDP. If this volume of exports could all be settled in renminbi, and if we assume that a commission of 0.1 per cent can be collected from these transactions, we are talking about an annual income of 10 billion yuan,' he said. 'If Hong Kong participates in renminbi trade transaction settlement services, it can gain a good share of this income.'

Many see promoting the use of renminbi in trade settlements as a first step by Beijing to raising the status of the currency in the international arena. Professor Lui said this strategy was important for China in that it would gradually reduce its reliance on US dollar assets and better protect its own economic interests.

'China has all along preferred US dollars to renminbi for its foreign trade,' he said. 'It has to exchange US dollars with its merchandise outputs. China has now accumulated some US$1.5 trillion in US Treasury bonds and other US dollar investments. Over the past few years, the renminbi has increased in value by about 5 per cent, but the returns from US dollar assets only averaged about 3.5 per cent each year. So China's wealth has been shrinking by some US$22 billion a year.'

Professor Lui said the prospect of the US printing money to finance its deficit had caused alarm among central government officials, as the subsequent fall in the dollar's value would affect China's trade and investment in the US. So they must find ways to promote the use of the yuan in international business. Using it in settling trade transactions would be a first step.

But will the yuan replace the Hong Kong dollar? The director of Chinese University's Centre for Entrepreneurship, Hugh Thomas, thought this would not happen at least in the short to medium term.

'When the renminbi becomes fully convertible, the Hong Kong dollar may be less relevant. [But would] the renminbi be fully convertible overnight? I doubt it, because [Beijing is] extremely cautious when it comes to making the currency [fully] convertible. This would take several years.'