Using RMB in trade settlements saves costs, says HSBC

KUALA LUMPUR: Trades between China and emerging markets will increasingly be settled in renminbi (RMB) as it helps save costs, says banking group HSBC.

Thomas Poon, head of business planning and strategy at HSBC in Hong Kong, said there were three key advantages in using the RMB for trade settlements - it saves hedging costs, reduces transaction costs and helps diversify currency portfolio.

At present, trades between China and emerging markets are settled mainly in a third party currency, namely the US dollar.

"(With the US dollar), basically, both sides have to manage that fund exchange exposure and as a result, incur some hedging cost.

"If China is willing to promote and develop RMB more into a trade currency, then potentially the saving on hedging costs on the Chinese side can be passed back, or split 50-50, providing a saving to the government and the overseas market, and potentially reducing the (cost) of the transaction as well," Poon told reporters here yesterday after delivering a presentation entitled "The Rise of the Redback" at a business forum jointly organised by HSBC Malaysia and the Asian Strategy & Leadership Institute.

As it stands, more than half of China's trade is with emerging markets.

There is already an increasing trend of the usage of RMB in trade transactions.

"We think by 2015, more than half of China's total trade flows worth about US$2 trillion (RM6.02 trillion) will be settled in RMB," Poon said.

On when the RMB may become fully convertible to other currencies, Poon said this may happen around 2020 although others expect it may happen earlier, around 2015.

He believes it would likely happen later than 2015 as there are still a lot of domestic structural issues that China needs to adress.

He noted that the RMB could become the third highest turnover currency in the world if it were fully convertible.