ANALYSIS: The financial benefits of a Renminbi link to UK SMEs

After a recent two-day visit to Beijing, Chancellor George Osborne has announced bold plans to establish London as an offshore trading centre for the Chinese Renminbi, bringing widespread opportunities to British businesses. Torrie Callander of Global Reach Partners investigates.

Osborne confirmed plans to create new links between the UK and China that would see London become a hub of international currency trade with our Far Eastern counterparts. This announcement is a positive step towards the Government achieving their ambitious expansion targets for British exports into the Far East. With UK Trade & Investment setting a target of 100,000 new UK businesses entering the export market within five years, any help that China can offer will be warmly received.

As it stands, the Renminbi (or Yuan (CNY)) is a heavily restricted currency; this has created a complex situation for SMEs in the UK who trade with the Chinese. The Yuan is, like many exotic currencies, divided into onshore and offshore pools – thus separating the domestic flow of money within China from the international flow to the rest of the world. This allows the Chinese Central Bank far greater control over their currency and is a major part of their Government’s long established policy of currency restriction. As with other restricted currencies, offshore Renminbi is available for purchase only which makes speculative trading of the Renminbi impossible, and guarantees its stability. Offshore Renminbi is currently available only via Hong Kong.

This has meant that British businesses dealing financially with Chinese trading partners have historically done so in US Dollars – the world’s reserve currency. If Osborne’s plans come to fruition and London does become a vehicle for international trade in the Renminbi, a raft of opportunities could be presented to the UK SME market.

The most immediate benefit will fall to those businesses that import goods from China and currently pay their suppliers using US Dollars. Increased access to the CNY will afford these businesses the opportunity to settle their invoices in the Chinese local currency. This will offer them two exchange rates to choose from, providing protection from the extreme volatility of the GBP/USD cross. This can only mean improved price protection for UK SMEs who often find themselves at the mercy of a weak pound or strong dollar.

The plans also aim to increase the availability of more complex financial products to those people dealing in the Renminbi. This will give importers a previously unavailable opportunity to hedge their CNY requirement, offering complete protection against adverse movements in the GBP/CNY. This will be particularly beneficial to those businesses that already deal in the CNY, but are restricted to doing so on a spot basis.

Improved opportunities for price stability to UK importers are important in a time of global recovery and uncertainty. 2011 was a year of extreme volatility in the currency markets and any protection from adverse trends will offer much needed assurance to the UK SME market.

Osborne’s plan has a more long term tactical aim: to provide exponential growth opportunities to the UK export sector. Increasing access to the CNY ultimately increases access to China as a whole. As the world’s fastest growing economy China is, without question, the major target for the expansion of a UK export network which currently relies too heavily on Europe as a trading partner.

Over 50 percent of UK exports are purchased by our European neighbours and, with the current threat of European instability looming large, a move into China is essential both as a safety net and as an expansion opportunity. As personal wealth levels in China increase along with business activity, UK offerings will become more attractive to the Chinese consumer and businessman alike. Greater access to the Yuan via London will put UK SMEs at a massive advantage as Chinese importation grows.

This is all equally attractive to a Chinese economy, which is far too heavily reliant on exports. The

This is all equally attractive to a Chinese economy, which is far too heavily reliant on exports.

Chinese are well aware that their expansion plans require an increased level of importation and are offering a huge vote of confidence to the UK by choosing London (currently the biggest FX market in the world) as its newest offshore currency centre. At this stage, no other European centre is being considered.

Should this trading relationship develop further, the UK market place as a whole can reap the benefits. London would act as the Western World’s access point to the Chinese currency which – as well as cementing our status as a leading financial centre - would offer the CNY to the rest of the world. This would undoubtedly improve trade relations on a global scale and be a major boost for the free market. As the global economy continues its stuttering recovery from the recent recession, improved global trade can only be good news for the UK, particularly when London is at the epicentre.

The Chancellor said; "Our objective is simple: we want to expand the amount of business and trade we do with each other, so that the citizens of China, Hong Kong and Britain all benefit from the prosperity and jobs that will bring."

This announcement is a major step toward him achieving UK PLC’s bold recovery plans. We as a nation need to recalibrate the dynamic of our industrial offering and become less heavily reliant on our services sector. Increased trading opportunities with China will offer UK exporters a much needed chance to grow.

By providing UK importers with increased access to the Renminbi, these plans will give businesses improved price stability and less risk. Both of these benefits in an environment of global growth – like the kind we could see if China continues to open its doors to the rest of the world – must be welcomed with open arms by British businesses.