Transacting in China's currency ‒ as opposed to U.S. dollars ‒ will dramatically boost international trade
Ever since Robert Sherkin started his company in 1997, all of his international deals have been done in U.S. dollars. However, with about 90 per cent of his business taking place in China, he wishes he could transact in renminbi.
"If someone gave us the option to do this, then we'd be very interested to see how it would work," says the president and CEO of Dynamic Tire Corp., a Woodbridge, Ontario-based company that imports tires, mostly from China, to sell around the world. "Going from renminbi to Canadian dollars and vice versa would likely be much more efficient."
Mr. Sherkin may finally have the chance to try this out. On November 8, Chinese and Canadian officials agreed to establish a renminbi trade hub here, which will allow Canadian companies to more easily open a yuan denominated bank account and trade with Chinese companies in their own currency.
While it has been possible for Canadian companies to transact in renminbi up until this point, it's a complicated process that involves a lot of paperwork and requires banks with branches outside of the country.
Only 5 per cent of domestic companies conduct cross-border transactions in China's currency, according to a 2014 HSBC survey, but many more have said they'd like to do it if the process were easier.
Right now, the vast majority of Canadian operations buy Chinese goods in U.S. dollars, while Chinese companies buy our products in greenbacks. Those American bills have to then be changed into either Chinese or Canadian currency.
This process involves multiple exchange rates and pricey forex fees, says Hendrik Brakel, the Canadian Chamber of Commerce's senior director of economic, financial and tax policy. If Canadian and Chinese companies could eliminate U.S. dollars from their dealings, then they could save at least 1 per cent in forex costs, he explains.
It's also likely that exports would increase if Canada could buy and sell goods in renminbi. In October, the Canadian Chamber of Commerce released a report that said that Canada could generate an additional $21-billion to $32-billion in exports over the next decade if companies could transact in China's currency with less effort.
Why the potential uptick? It's because more Chinese buyers would be willing to trade with Canada if transaction costs were cheaper and if money management were simpler, wrote the Chamber in its report.
"Most of Canada's exports to China are global commodities… which are highly competitive with thin profit margins, so that denominating these sales in could be a significant inducement to Chinese buyers," wrote the Chamber.
The Chamber of Commerce also thinks that Canadians would save millions on imports. If 30 per cent of Canadian companies paid for their goods in renminbi, businesses could save a total of $2.75-billion over the next 10 years.
Linda Seymour, HSBC Bank Canada's executive vice-president and head of commercial banking also thinks trade would increase if Canadian companies could transact in renminbi in a more straightforward way.
"China is Canada's second largest trading partner behind the U.S.," she said in a July release. "Canadian businesses need to learn more about how using renminbi can help them reduce costs and secure a competitive advantage when trading with China.
"Whether a Canadian company is importing from or exporting to China," she adds, "transacting in renminbi not only offers financial benefits, it can also open doors to new business."
Time for a trading hub
At the moment, using renminbi is a challenge, in part because the Chinese government has only recently allowed its currency to be used in foreign transactions.
"They didn't want the renminbi to be subject to the vagaries of international speculation," says Yuen Pau Woo, a senior resident fellow of Asia Pacific Studies at Simon Fraser University's Beedie School of Business, and former president and CEO of the Asia Pacific Foundation of Canada.
That made sense years ago ‒ the country's economy was small and it didn't participate nearly as much in international trade as it does now, says Mr. Woo. Over the last few years, though, as China has become an international trading powerhouse, it's started to allow for renminbi outflows.
China, though, has only allowed some countries to easily convert Chinese dollars into their local currency via a trading hub. There are hubs in Germany, Singapore, London, Hong Kong and other locales – and now Canada will have one too.
The trading hub is essentially a clearinghouse where renminbi can be converted directly into the local currency. There's some debate as to where the Canadian hub will end up ‒ in Toronto or Vancouver ‒ but the location should make no difference to Canadian companies.
A hub will allow businesses to open a renminbi account at any Canadian financial institution, in the same way they can open a U.S. dollar-denominated account at their bank. Conversions would then take place more quickly, more efficiently and with a deeper pool of liquidity, says Mr. Woo.
"Creating this kind of hub will make renminbi more available and less expensive," he says.
For business owners like Mr. Sherkin, a hub is a welcome development. Not only will it allow him to more easily trade with his Chinese partners, but it could also bring him new customers who only want to deal in renminbi. He'll also save money on every transaction.
"If we could set renminbi as a base, then there would be one less intermediary," he says. "One less person would have to get paid."
Trusted trading partners
From a trade standpoint, a Canadian hub makes a lot of sense. Over the last decade, China has become Canada's second-largest trading partner, with exports rising from $5-billion to $20-billion, and imports from $18-billion to $52-billion.
Total trade is already up 8 per cent in the first six months of the year compared to the same period in 2013. With Canadian companies looking to diversify into new markets, trade with China will only increase.
Canadian companies will now have a competitive advantage ‒ a Chinese business would rather buy wood from Canada in renminbi than from Brazil in U.S. dollars, says Mr. Brakel ‒ and business owners may even be able to seek out renminbi-paying investors.
For now, Mr. Sherkin will continue paying for his goods in American dollars, but as soon as the hub is up and running, he won't hesitate to make a switch.
"It is coming up in discussions," he says. "I want to see how it could work."
For more global business insights, visit globalconnections.hsbc.com/canada/en
This content was produced by The Globe and Mail's advertising department, in consultation with HSBC. The Globe's editorial department was not involved in its creation.