Significance of Canada as an Offshore Renminbi (RMB) Hub
Why is the Canadian RMB hub important for business?
- China is the world’s second largest economy and the second largest trading nation by value of two-way trade.
- China is an important trading partner for Canada, with $78 billion in two-way trade in 2014.
- Despite China’s trading power, its currency, the Renminbi (“RMB”), ranks fifth among currencies used in global payments. The gap between China’s trade power and its currency share in world payments suggests great growth potential for the use of RMB.
Due to its designation in November 2014 as the RMB trading hub for North America, Canada is positioned to take advantage of this growth potential. In doing so, it will provide immediate benefits for firms within Canada and throughout North America by:
- Enabling Chinese buyers to pay in RMB, which should bring immediate benefits to Canadian companies through reduced transaction costs and a more efficient payment process.
- Making Canadian business, through their acceptance of and payment in RMB, more attractive to a wider range of Chinese sellers and buyers.
- Allowing Canadian firms to reap the benefits of conducting business in RMB without changing their corporate banking relationship or their business hours.
RMB usage is driven by cost saving and business opportunities
According to a January-February 2015 survey of 150 senior executives around the world conducted by international law firm Allen & Overy LLP, lower transaction and lower funding costs were the main reasons for businesses to switch to RMB for payments in cross-border transactions. The chart below shows the percentage of respondents selecting a given reason among their respective top five.
Canada’s trade links to China
Canada already has a strong trading relationship with China with $78 billion in two-way trade in 2014. BC is Canada’s biggest exporter to China – BC exports constitute 34% of Canada’s exports to China by value. Further, 18% of BC’s exports are to China, making China BC’s second largest trading partner (after the United States). Ontario is Canada’s biggest importer from China, with 58% of Canada’s imports from China by value.
The RMB ascendance will only accelerate
China is seeking a greater role in the global marketplace, but to achieve this, it must create greater demand for the Chinese currency. Policy reform has been significant in the last two years and the use of RMB as a medium of exchange has gained significant momentum. RMB has moved from 13th to 5th among global currencies in terms of payments, but at 2.03% of global payments, its usage is far below the USD at 44.64% and the Euro at 27.21%. Considering that China’s share of world trade was 10% in 2013, the RMB is underutilized relative to China’s importance in world trade.