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China's RMB could soon be one of the three top global currencies. Photo / Thinkstock

New Zealand exporters and importers need to get on-board with the move to Renminbi (RMB) trading in order to avoid being left behind as the internationalisation of China's currency gathers pace. That is the message from Gary Cross, Head of Trade and Supply Chain at HSBC New Zealand.

"Using the RMB for trading with China is just one way New Zealand exporters and importers can be ahead of the game," he says. "Because the reality is that they are not competing with other New Zealand traders for opportunities to trade with China, they are competing with the rest of Asia Pacific.

"Importers and exporters have only been able to make payments in RMB since August last year, so in the bigger scheme of things it is still relatively early days.

"What we're seeing is that a number of New Zealand businesses have now moved beyond the exploratory stage and are beginning to understand the benefits and advantages trading in RMB can provide. "

HSBC is speaking to a number of business about opening RMB accounts and conducting cross-border transactions. Cross makes the point that anything you can do with a US dollar account can be done with a RMB account.

Kiwi clean technology company LanzaTech - an HSBC client - has been quick to move to the new China business paradigm. In March, LanzaTech formed a joint venture with China's largest steel and iron conglomerate, Baosteel, and the Chinese Academy of Sciences to construct a plant that will use the Kiwi company's gas fermentation technology to produce fuel ethanol from steel mill off-gases.

LanzaTech chief executive Jennifer Holmgren says China is a huge opportunity for the company. "It is so committed to carbon reduction and energy security. The reason they are so interested in what we are doing it they are so focused achieving their carbon reduction goals."

The company has established a wholly foreign-owned enterprise or WOFE which is fast becoming a popular form of investment into China. "We now have a Chinese entity." Says Holmgren "Not just a New Zealand or United States entity, we have one that that will be our channel to market in China."

She adds that if you do business in China you have to create an RMB entity. "We feel that it's extremely important if we're going to do business in another country to be part of that other country's business arena - not just be somebody who checks in and out - for us basically the key is really needing to be part of China. We will do as much as we can in RMB."

HSBC estimates nearly US$2 trillion worth of China's annual trade flows could be settled in RMB by 2015, making it one of the three top global currencies in the world. This would equate to half of China's trade with emerging economies being settled in RMB, up from 3 per cent last year. HSBC estimates the "Redback" could be fully convertible in five years - much earlier than the bank's last forecast of 20 years.

"New Zealand businesses need to understand how they can trade using the Renminbi now - waiting until the currency is fully convertible to start this process will be too late," says Cross.

Reflecting just how fast the take-up of RMB has been, HSBC's latest Trade Confidence Index has shown that in 2011 RMB will be one of the top three trading currencies, pushing the Sterling into fourth place for the first time.

Given China is New Zealand's second-largest trading partner, this has huge implications for New Zealand businesses trading with China.

"New Zealand's economy is more tied to the Asian region than ever before. As emerging Asia continues to grow, income levels are rising and so too is demand for protein," says Cross. This is supporting milk and meat prices and will boost incomes and investment in New Zealand,

"Recent research has suggested the world's population is forecast to grow from the current 6 billion to more than 9 billion by 2050 and 98 per cent of this growth will be in emerging markets. New Zealand is uniquely placed to take advantage of that growth. "

The big growth in transactions invoiced in RMB played a role in the Reserve Bank's decision to set-up a $5 billion (25 billion RMB) swap-line with the People's Bank of China to support settlement of trade transactions between New Zealand and Chinese businesses.

The facility gives the Reserve Bank the capacity to borrow RMB for use in rare situations where financial market disruption makes it difficult for businesses to access RMB.

The problem is that as the RMB isn't an internationalised currency it can be difficult to get outside China - the swap facility provides a mechanism in NZ if normal market linkages have broken down.

An example where the facility could come into play is where someone in NZ is selling product to China and they want to do that deal in RMB. All going well the RMB flows from the Chinese entity's account in China, through a Chinese bank authorised to make payments in RMB offshore, to a NZ bank's RMB account at that bank. The NZ exporter can then hold the RMB in their account at the NZ bank or can use that RMB to pay someone else.

If parties have the appropriate customs documentation the transaction can go through - once the RMB is with the NZ bank it may be freely transacted.

A problem can arise if the NZ bank has a relatively large amount of trade settlements to do in a short period of time. Each NZ bank has a limit on the amount of RMB it can receive on behalf of customers over a period of time (e.g. over a six monthly or annual period). However, the NZ bank might reach its settlement limit, making it impossible to settle RMB transactions already agreed to. In this situation the RBNZ could use its swap line to borrow RMB and provide the RMB to NZ banks so they can settle transactions on behalf of customers.

The $5 billion amount was derived by looking at the size of the other swap-lines China has in place, scaled by NZ's relative size in terms of indicators including trade flows with China and the level of GDP.

The need for a swap line for trade purposes will lessen in the future as the Chinese RMB becomes more internationalised and tradeable outside China. Once this happens it will be easier for market participants to access RMB from the market - even in relatively difficult circumstances - compared to now.