Agribusiness

China exports could bypass US$ to trade in local currency

Jon Condon 21/07/2013

 

While it doesn’t appear to have happened as yet in the export beef trade, there is growing interest being shown in the prospect of trading agri-commodities into China in the domestic currency, the Renminbi, rather than US$.

With the exception of a little trade into the EU in Euros or British Pounds, the overwhelming majority of Australian beef export business is currently transacted in US$, trade sources say. A little Australian beef traded into Japan was conducted in Yen at one stage, but that has now also reverted back to a US$ basis.

But financial institutions are increasingly putting the prospect in front of export players and their Chinese customers for trade into China based in Renmimbi (RMB).

The move is being driven in part by the explosion on growth in beef trade into China over the past 12 months. As highlighted in Beef Central’s recent 2012-13 export trade summary, China last fiscal year took 92,300 tonnes of Australian beef, compared with just 7700t for the previous 12 month period.

That’s a breathtaking 1098pc increase in volume, elevating China into fourth position in overall export destinations, from nowhere a year earlier.

More Australian corporates are seeking the benefits and competitive advantage of transacting in RMB when doing business in China, NAB Agribusiness advised red meat processors recently.

A surge in RMB payments from the middle of last year had propelled Australia from twelfth position to position five in the list of nations transacting in the currency.

With China as Australia’s number one trading partner, taking over a quarter of Australia’s exports and suppling around 15 percent of its imports, the trend to RMB was likely to intensify further, NAB told processors.

“What we’re seeing with some of our clients in mining, agribusiness and consumer goods is that the leading players are already taking steps to trade in RMB,” NAB’s executive general manager of everyday banking and payments, John Murphy said.

“Chief executives and CFOs of a lot of companies are looking to seize first-mover advantage on RMB,” he said.

Trading and transactions in foreign currencies in China remains heavily regulated, so there were significant advantages for Australian companies willing to deal in RMB.

“Banks in China are more willing to do trade financing in RMB because the Chinese government places severe restrictions on financing in foreign currencies,” Mr Murphy said.

“For instance, any foreign currency letter of credit with a term of more than 90 days needs state approval and is counted in the issuing bank’s foreign debt quota.”

Agricultural commodity corporates and small to medium-sized commodities traders were already moving receivables to RMB from US$ because their Chinese customers were ‘demanding it’, he said.

Companies prepared to transact in RMB could also increase their bargaining power with trading partners and potentially negotiate better prices, because their Chinese customer won’t have to factor-in the foreign exchange risk and transaction costs if business was transacted in their own currency.

“The fact that Australian companies are happy to do business in the local currency sends a very strong message to the Chinese market,” Mr Murphy said. “It can make the negotiations simpler. It’s one less thing to worry about.”

RMB has been making progress to becoming a global trade currency since 2009 when the Chinese government launched a pilot cross-border trade settlement scheme. In March last year the scheme was expanded to all Chinese companies with import/export licences, paving the way for more foreign companies to start transacting in the local currency.

In April this year, the Australian Government signed an agreement with China’s Central Bank, the People’s Bank of China, to allow the A$ to be converted directly into RMB. This made the A$ only the third major currency to achieve this status after the Yen and the US$.

With global banks projecting that 30pc of international trade will be settled in RMB by 2015, the RMB is on track to become one of the top three trading currencies in the world.

Sanger Australia chief executive, Paul Ibbotson, said he had not heard of any Australian beef trade into China being transacted in RMB, but recognised it as a prospect.

“The facility has been available with a number of banks, including HSBC and NAB for some months now,” he said.

“We’re already offering it to importers, but so far they have been fairly strongly resistant to doing it. Our general view is that the Chinese are gamblers by nature, and their interest in watching the A$ and US$ float around against the RMB means they see some opportunity to speculate.”

Mr Ibbotson said he was unaware of any red meat trade out of Australia in beef, lamb or mutton, being paid in RMB yet.

“We can’t see it happening in the foreseeable future, but circumstances might change,” he said.

“But it’s good that the option is there, and if the situation does change for any reason, the facility is available.”

  • The A$ value has declined this year relative to the RMB. On Friday A$1 was worth 5.64 Chinese Yuan, down from about 6.5 Yuan at the start of the year. 

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