Better trading flexibility with China

KUALA LUMPUR: Since Malaysia is appointed a trading hub for China’s currency, businesses here have greater flexibility to trade with China, said Bank of China (Malaysia) Bhd chief executive officer Wang Hongwei.

As long as the US dollar remains the trade currency of choice, many transactions will continue to require a three way conversion, from the ringgit to the US dollar to renminbi with a loss of basis points at each conversion.

“There’s savings to be reaped from direct conversion between the ringgit and renminbi. 

Businesses in Malaysia can now open bank accounts in renminbi and trade directly,” Wang told Business Times in an interview.

Currently, companies in Malaysia buying from and selling to China have to convert the funds used to finance those deals into an intermediary – usually US dollar – an extra step that adds costs.

For businesses in China, receiving payment in renminbi will become cheaper and easier, and the ability to negotiate better settlement terms will reduce operating costs. Similarly, businesses taking in imports from China are wondering if savings from direct conversion between the ringgit and renminbi could be passed on to consumers here in cheaper prices.

Conversely, Malaysian exporters shipping their products into China want to be able to sell at better valuation when quoted in Renminbi. 

Despite the advantages offered by direct transactions with the renminbi, years of familiarity dealing with the US dollar are not likely to be replaced overnight. Many businesses seemed to prefer the certainty of the familiar over the promises of the new. 

Also, there is lack of awareness that changing to renminbi can be a source of competitive advantage, or that their ability to negotiate discounts and settlement terms may reduce operating costs – with flow-on effects to working capital management.

Wang noted that many customers do not seem to be aware of discounts they can negotiate if they are prepared to invoice and settle in renminbi. “Both Malaysian and Chinese corporates appear to be waiting for the other to initiate a change to invoicing in bilateral trade,” he said.  

According to Bank Negara Malaysia, only 1.3 per cent of China-Malaysia bilateral trade in 2014 were invoiced and settled in renminbi. Given that less than 2 per cent of Malaysian companies transact in Renminbi, compared with a global average of 22 per cent, there is real scope for growth, especially when China is Malaysia’s biggest trading partner.

According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the renminbi overtook the euro in 2013 as the world’s second-most used in trade finance and is now the fifth most-popular for global payments.

SWIFT connects more than 9,700 banking organisations, securities institutions and corporate customers in 209 countries. 

Renminbi clearing houses outside China are seen as a major tool in promoting internationalisation of the Chinese currency. The first global settlement hub was created in Hong Kong in 2003. Todate, China has authorised 15 overseas renminbi clearing houses.

In April 2015, China's central bank People's Bank of China appointed Malaysia as the second Asean nation to host a renminbi clearing house, after Singapore. Commercial entity Bank of China in Kuala Lumpur was the chosen one.

This arrangement is backed by 180 billion renminbi currency swap between People's Bank of China and Bank Negara Malaysia until 2018. This essentially means Bank Negara Malaysia will step in to backstop any deals, if credit dried up during a crisis. 

The original currency swap arrangement between China and Malaysia was established in 2009 with just 80 billion renminbi. It was enlarged to 180 billion renminbi in 2012 and renewed for three years to 2015. Recently, both governments extended it for a further three years to 2018.

The renminbi is now the first foreign currency to be included in the Malaysian clearing system via Bank Negara's subsidiary Malaysian Electronic Clearing Corp Sdn Bhd (MyClear). Bank of China in Kuala Lumpur is working with MyClear in settling renminbi via the Real-time Electronic Transfer of Funds and Securities System (Rentas).

In 2010, Bursa Malaysia Derivatives’ clearing house began accepting renmimbi as margin collateral for palm oil trading, a move that signifies China’s importance to Malaysian derivatives market. Two years later, Bursa Malaysia Derivatives’ clearing house appointed Bank of China in Kuala Lumpur as an official member to settle such trades.

By having a renminbi clearing house in Kuala Lumpur, banks in Malaysia will have direct access to onshore renminbi markets in China without having to route their transactions through a mainland lender.

Todate, Wang said Bank of China in Kuala Lumpur already captured almost 70 per cent of renminbi clearing because it is linked with 26 other commercial banks here. In achieving its Beijing headquarters' aspiration for it to be "an Asean player", it had also attracted financial institutions from Vietnam and Singapore to set up renminbi clearing accounts.