Zeti Akhtar Aziz: Renminbi trade settlement and investment in Malaysia
- future prospects
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
Seminar on "Renminbi trade settlement and investment in Malaysia - future prospects",
Kuala Lumpur, 27 September 2012.
* * *
This decade has seen significant change in the configuration of the global economy. In this
evolving global landscape, Asia is emerging as an increasingly important component of the
world economy. During this period, most of the Asian economies have experienced
remarkable growth, despite a most challenging environment. With rising incomes in the
region, Asia has also become a huge cumulative market. This trend has in turn prompted
greater intra-regional trade and investment activities. A more recent trend in the Asian region
is the greater regional financial integration that is facilitating greater cross-border financial
flows in the region that is funding productive investment activities in the region.
Following the recent global financial crisis, the most pressing challenge for the world
economy is to achieve economic strength that is sustainable. While most national economies
have implemented wide ranging policy measures to promote growth, equally important are
the efforts to sustain world trade which will be mutually reinforcing to global growth. China's
economic journey in this global shift and the growing influence of renminbi ushers us into a
new exciting era. China, by its sheer size and its economic performance has significant
potential to contribute to world growth. Its demand, trade and cross-border investment
activities will reinforce this potential. The recent trend for the use of the renminbi for
settlement of trade and cross-border investment activities will facilitate this potential.
It is my pleasure to welcome you to this Seminar on "Renminbi Trade Settlement and
Investment". I would like to take this opportunity to extend a warm welcome to our guest
speakers from the People's Bank of China and the Ministry of Commerce (Mofcom) of the
People's Republic of China. I also wish to welcome our panellists from the financial industry
and the corporate sector that are here today to share their experiences in operating in the
current challenging economic and financial environment.
The economic relationship between Malaysia and China is longstanding and grounded on
strong foundations. Today, China is Malaysia's largest trading partner accounting for 14% of
our country's total trade. Malaysia also ranks as China's most significant trading partner in
the Asean region. Our trade with China has continued to expand, increasing by 20%
annually, in this recent two decades. Our bilateral trade with China is now seven times higher
than the level in the early 1990's.
Our economic relations have also evolved and expanded beyond the area of trade - into the
services sector, particularly the financial sector, tourism and education. China is among the
top five tourism markets for Malaysia and Chinese nationals represent the largest foreign
student population in Malaysia's private universities and colleges. Bilateral investment is also
gaining importance, notably with the two recent Government-to-Government agreements,
involving the establishment of an industrial park in both countries. The cornerstone to the
strength of our bilateral economic relations is the ability to continually harness the synergies
and economic complementarities that exists between our economies.
The use of renminbi for trade settlement provides a natural hedge for businesses with
renminbi obligations. It also generates cost savings and minimises exchange rate risks, in
particular, it reduces the exposure to exchange rate fluctuations of a third currency. While the
dollar will continue to remain an important currency for settlement of trade obligations, the
availability of renminbi would provide companies an additional currency for such trade
settlement.
The benefits to be gained can be significant given the large and increasing trade base with
China which stood at RM167 billion in 2011. By undertaking the transactions in local
currency, exporters and importers in China would be able to eliminate the hedging and
conversion costs. The reduction in transaction costs for the exporters and importers will
contribute towards more competitive pricing for both exporters and importers. The full
potential benefits are however expected to be realised in stages. The benefits will rise as the
trade volume settled in renminbi increases and reaches a critical volume in terms of size
which will in turn allow for the realisation of economies of scale.
For the renminbi to be considered an option for both exporters and importers to settle their
trade obligations in addition to the major currencies. There needs to be an efficient and
cost-competitive source of financing in renminbi and a diversified investment avenue. In
particular, it is recognised that discernible progress in three areas are needed to be put in
place at an early stage to support the use of renminbi, that is, to improve access to renminbi
liquidity, to have the supporting infrastructure and framework and to provide information on
the use of the renminbi for trade and productive investment transactions. More than three
years ago, in early 2009, the Bank entered into a Currency Swap Arrangement (CSA)
Agreement with the People's Bank of China, which was renewed early this year with an
expanded amount of Renminbi 180 billion. The objective is to ensure a ready supply of
renminbi in the domestic financial markets to meet the demand by businesses.
An important piece of the infrastructure that was put in place in 2010 was the provision of
direct quotes between renminbi and ringgit in the interbank foreign exchange market on the
China Foreign Exchange Trade System (CFETS). Efforts were also made to enhance the
transparency in the exchange rate between renminbi and ringgit for the trade-related
settlement transactions. In March this year, the real time gross settlement system in Malaysia
was expanded to include settlement services in renminbi. This serves to provide a safe and
efficient clearing and settlement platform that supports trade and investment flows in
renminbi.
A nationwide awareness program by the banking institutions and the business chambers is
also creating greater awareness on renminbi for trade settlement and investment. The Bank
has also participated in the Chinese interbank bond market. In 2011 alone, the size of
renminbi trade settlement in Malaysia expanded by four times from the level a year ago,
reflecting a growing interest in renminbi as a settlement currency.
The expansion in renminbi usage has also been underpinned by a diffusion of corporate
players, both in size and across the sectors. Not only has the number of corporate players
increased, but there has been a shift in relative significance in the use of renminbi as a trade
settlement currency from the smaller to the larger corporations. There has also been more
widespread corporate participation from a larger cross-segment of economic activities,
namely the commodity based industries, manufacturing and services sectors that also
includes tourism and education. There has also been an increase in the number of financial
institutions participating in renminbi trade settlements. There are now 19 financial institutions
that facilitated such trade settlements, double the number in 2009.
More recently, there has been an increase in the use of the renminbi as an investment and
funding currency. In the first seven months of this year, renminbi deposits in the banking
system had tripled. Also evident is the growing interest in raising financing in renminbi to
meet funding requirements, with two issuances of offshore renminbi sukuk out of Malaysia
and a renminbi bond issuance by Malaysian corporations.
The progress made thus far, while modest, has significant potential given the significant
volume of the bilateral cross-border trade and foreign direct investment between our
economies. Trade settled in renminbi currently only represents slightly above 1% of
Malaysia's bilateral trade with China. There is therefore potential for this to increase. In
addition, funding and foreign direct investment activities in renminbi have also increased with
the greater awareness on the use of renminbi for the settlement of trade and direct
investment transactions and on the potential to raise financing by businesses.
Important to this initiative is the access to a wider array of portfolio investment avenues in
renminbi. The availability of renminbi bonds and sukuk as well as other financial products for
portfolio investment will not only encourage renminbi receivables, but it will also help to build
a pool of trade-driven renminbi liquidity in the Malaysian market. Another important channel
that would support the use of renminbi in trade and investment is repatriation as foreign
direct investment in real sector activities in China increases.
Raising funding in renminbi has also emerged as a further form of business in the Malaysian
financial system. This has been the conventional channels by the banking institutions and the
issuance of renminbi instruments in the bond and sukuk market in Malaysia. Malaysia is well
positioned to realise this growth potential in renminbi bond and sukuk, given our market size
and supporting infrastructure. Malaysia not only has the largest debt securities market in
Southeast Asia, but it is also a leading international centre for sukuk issuance. Both markets
are evolving as a multi-currency bond and sukuk market.
As the renminbi market expands, more information would be needed to provide awareness
on market developments. As we transition to using other currencies for trade settlement it will
also require businesses to gain new expertise, develop new arrangements and to build new
networks.
Let me now conclude my remarks. As Asia, and in particular, China's greater prominence in
the global economy, a dynamic response is required in this new operating environment that
is now upon us. One of the changes that will shape the international financial system in the
years to come is the wider role of the renminbi in trade and finance. While existing
international reserve currencies will remain to be important, this will represent an additional
currency in the international financial system. This is an expected development as the world
economy becomes increasingly multi-polar.
In a more complex and more challenging economic and financial environment that is prone to
greater volatility and increased uncertainty, there will be a greater trend to diversify risks.
This will also contribute to overall global stability in the international financial system. On our
part, the Bank is committed to collaborate with the Chinese authorities to facilitate the use of
renminbi that is anchored on real sector activities for the mutual benefit of our countries.
Today's seminar will discuss the issues concerning the use of renminbi in trade and
investment. On this note, I wish you all a productive and successful engagement.