BRITAIN has recently said it will partner with Hong Kong to develop the City of London as a major offshore centre of trade in Chinas yuan (Renminbi) currency.
This deal sees Britain and Hong Kong agreeing to launch a joint private sector forum to enhance cooperation and support Chinas efforts to develop the offshore market for the renminbi (RMB).
China's economy continues to expand rapidly and, along with it, commercial ties with the UK and opportunities for Kirklees businesses. Exports of goods from Britain to China leapt 20% in 2010, a measure of the importance of Asia to Britains long-term economic growth.
HSBC expects this growth to generate further significant opportunities for businesses looking to develop their products and services in new markets.
Recent deregulation has further opened the Chinese market to enable an increasing number of Chinese trade partners to receive cross-border payments in their local RMB currency, in addition to their capacity to make cross border RMB payments.
Last year, HSBC launched a service enabling UK businesses to open a UK-domiciled RMB account which can then be used to trade with and make payments to mainland China in the countrys own currency.
Therefore, commercial contracts can now be agreed in RMB, allowing Chinese suppliers to invoice and receive settlement from UK buyers in local currency, enabling them to avoid foreign exchange risks and costs.
Why is RMB growing in importance?
China is the worlds second largest economy, the largest exporter and the fifth-largest source of foreign direct investments (expected annual growth of 40-50%). HSBC believes that RMB will become a top three international currency if it becomes fully convertible.
So what does this mean for businesses in Kirklees?
Previously, RMB was a restricted currency that could not be taken out of China, meaning companies had to change RMB back into US dollars or euros to hold it outside China. The deregulation of RMB means companies can hold the proceeds of trade settlements in RMB. A natural currency hedge will be achieved for businesses who have existing receivables or payments already in RMB.
Those businesses seeking to become RMB-enabled first need to check their internal accounting systems can cope.
Businesses should also check their bank has the capability to handle RMB transactions many dont as yet.
As RMB becomes more commonplace in the future, businesses which have RMB capabilities may find they can negotiate improved trading terms with Chinese suppliers and purchasers.
While the internationalisation of RMB has begun, the currency is not yet fully convertible and businesses need to observe the existing regulatory guidelines set out by the Chinese government.
HSBC relationship managers are well placed to help businesses keep pace with the fast moving changes.
Businesses trading in foreign currencies always need to be mindful of foreign exchange risk.