A growing number of companies in Europe are choosing to settle trade in renminbi to improve their position in price negotiations when doing business with partners in the world's second-largest economy, Deutsche Bank has found in a survey.
The bank surveyed 102 companies from the UK, Germany and the Netherlands in April and May and found that 20% of the respondents already invoice their trading partners in renminbi. The remaining 80% indicated that a switch to invoicing in renminbi is in the pipeline.
The companies said that using renminbi can help reduce prices in negotiations with Chinese business partners by an average of 4.8%. Around 60% of the responding companies have a China business turnover of less than Rmb10 million ($1.57 million).
This is Deutsche Bank's first survey of this kind so there's no historical data available to compare with. But the use of the Chinese currency in global trade settlement is growing rapidly. Trade outside of China using renminbi currently amounts to around $2 billion per day, which means that trade in the US dollar/renminbi currency pair has doubled in volume over the past 15 months to $1 billion, according to Deutsche Bank. Cross-border renminbi processing volume rose by 42% year-on-year to Rmb1.4 billion in the first half of 2012.
“We are seeing a growing trend towards the use of renminbi transactions, particularly from SMEs,” said Nils Ole Matthiessen, the bank's head of global finance and foreign exchange structuring, Germany and Austria.
In doing so, companies are able to expand their network of suppliers and buyers by bringing on board more Chinese companies which, in the past, only had limited access to Western currencies. They are also improving their negotiating position with Chinese customers and suppliers. What’s more, transaction costs are reduced and buyers can secure price reductions of an average of almost 5%, Matthiessen said in a statement.
The greatest obstacles in international foreign exchange transactions, the survey found, are slow payment processing and a difficulty in obtaining approval for payments from the Chinese authorities. These two hurdles were mentioned by 30% and 15% of respondents, respectively.
In spite of increasing volatility in foreign exchange markets, only around half of the surveyed companies hedge their foreign exchange risks in renminbi transactions.
In June, Deutsche Bank became the first bank to introduce cross-border renminbi payment processing under a pilot renminbi payment scheme that is backed by the People's Bank of China. The new payment scheme allows certain China-based companies to invoice and settle cross-border trades in renminbi without having to provide documentation for pre-trade verification.
Deutsche Bank claims that it processes between 20% and 30% of global trade in renminbi outside of China through this system.
Currently, most banks are required to physically check the documentary proof of each underlying trade transaction before they can process a renminbi payment on behalf of their corporate clients.