C.J. Gavsie (left), co-head of Global Fixed Income Currency and Commodities at BMO Bank, puts through the first-ever Canadian dollar to RMB trade through North America's first trading hub for China's currency at BMO Bank's trading floor in Toronto on Tuesday, March 24, 2015.Chris Young/The Canadian Press
Monday's official launch of Toronto as a settlement hub for the offshore Chinese currency seems important. Then again, so does agricultural policy reform, but it's of limited use in capital markets and/or dinner conversation. How much of an impact will renminbi settlement in Canada really have?
In 2009, currency controls on the renminbi began to ease – Chinese companies were allowed to use the Hong Kong market to trade their renminbi (dubbed CNY) for "off-shore Renminbi" (known as CNH), which could then be freely used in all sorts of transactions. In 2010, for example, McDonald's Corp. sold 200-million worth of renminbi-denominated bonds via Hong Kong; the company was now more or less able to use the funds from the sale to, say, pay the salaries of its executives in Beijing, all without incurring the cost of exchanging U.S. dollars (or whatever it had on hand – Euros, frozen McNuggets) for renminbi.
Not long after, China opened settlement hubs in cities, including London, Frankfurt and Seoul. Now we have one in Toronto and Canadian companies can issue renminbi bonds, enter into currency hedging forward contracts that pay out in renminbi and other such activities with ease.
Let's say I am the chief financial officer of a Canadian retailer that primarily buys cheap plastic stuff from China and sells it for a dollar. If my Chinese suppliers preferred to be paid in renminbi, and I wanted to hedge my currency exposure in case it goes way up against the Canadian dollar, I can buy a futures contract on the Hong Kong Exchange (HKEx) locking in my exchange rate between CNH and the U.S. dollar, and if I need to, exchange my U.S. dollars into Canadian.
In that transaction, a Canadian renminbi hub would potentially spare me the expense of converting USD into CAD. Jason Henderson, executive vice president and managing director, head of global banking and markets for HSBC Bank Canada, explains the change: "In some ways, this renminbi hub is something that we've always had for our clients. What it's doing in Canada is basically expanding that. Every Canadian company now should become more aware of the opportunities to hedge locally here in Canada without having to set up accounts in Hong Kong.
"If they want to negotiate a deal with an on-shore Chinese company, they can say, 'Well, I can negotiate this deal in renminbi because I now have all of the tools available to me to manage and hedge that relationship.'"
Mr. Henderson hopes that ease of doing business will translate into Canadian companies doing more trade with China, and evolves into a familiarity similar to the one we have with the U.S., still our biggest trading partner.
Whether domestic businesses gain a major advantage from the ability to trade with Chinese companies more or less directly in renminbi is debatable. A Canadian Chamber of Commerce report says they do, citing estimates of a potential $6.2-billion in savings over the next decade from not converting U.S. dollars into Canadian.
That's assuming they want to convert them. Canadian companies currently do so much other business in U.S. dollars that the prospect of holding greenbacks after doing a deal hardly seems like an obstacle.
Then again, if this renminbi hub means fewer hours for Canadian bankers negotiating on Hong Kong time, the thing might just take off.