The internationalization of the renminbi has taken another big step forward with the issue of Latin America's first-ever letter of credit denominated in the Chinese currency, Citi said on Monday.
In a statement, the US bank said it had issued the renminbi letter of credit for a Peruvian client in the retail sector, enabling it to “significantly improve conditions for its imports.”
Although banks in Latin America have long paid for goods and services using renminbi on behalf of their clients, including Citi since 2011, this latest move should provide companies in the region with greater flexibility in their dealings with Chinese counterparts.
Letters of credit allow companies to purchase goods without paying up front, thereby greasing the wheels of trade finance and helping to maintain a smooth supply of imported goods and parts. They are typically used by companies in Latin America when buying from companies in China.
“This is a way for us to offer added benefits to our clients who trade with China,” said Mauricio Schwartzmann, Head of Treasury and Trade Solutions at Citi Peru.
According to Citi, trade between China and Latin America grew 8% to more than $255 billion in 2012, making Latin America its second-biggest market.
Sales from China to Latin America include consumer products and manufactured goods - such as toys and footwear - and electronic components. China also imports huge amounts of raw materials from Latin America, such as copper and iron ore.
Chinese sales to Latin America grew by 11% in 2012, reaching $131 billion, while Latin American exports to China expanded by 5% to $125 billion. Peru accounted for approximately 6% of this total trade. As of July 2013, China was Peru’s second-largest trading partner.
Citi launched a Latin American trade desk in Shanghai in March 2012 to help link its Latin American clients with Asia.
The internationalization of the renminbi has been something of an enigma since Beijing opened an offshore market in Hong Kong in 2010. Since then, Taiwan, Singapore and London have all made efforts to offer a rival centre for renminbi transactions. Many leading companies globally are also already content to settle their transactions in China in renminbi.
According to international payments platform Swift, the renminbi was eleventh in the rankings of world currency payments in August, with a 0.87% market share, up from fourteenth in January, and seventeenth in January 2012.
