Foreign exchange fees avoided | Researcher predicts increase in Canadian agricultural exports
Canada will be the first country in the Americas to have a clearing bank with China, smoothing trade with the second most valuable market for Canadian agricultural exports.
The renminbi is the official Chinese currency, often referred to as the yuan.
The clearing bank is part of a series of measures adopted by China and Canada to increase the use of the Chinese currency in trade deals.
Daniel Koldyk, senior researcher with Export Development Canada, said the measures should make it easier and more economical for Canadian companies to do business in a market that bought $5.6 billion of Canadian agriculture and seafood exports last year.
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The clearinghouse will allow exporters to convert transactions directly between the Canadian dollar and the renminbi.
Most trades done today have to be looped through the U.S. dollar, which means a foreign exchange fee is charged on both sides of the transaction.
“It is like a double whammy,” said Koldyk.
Those fees can be substantial, from .5 percent of the transaction for large deals to 2.5 percent for smaller trades.
The clearing bank makes it possible to eliminate the extra foreign exchange fees.
“That in itself on large commodity trades can lead to huge savings,” said Koldyk.
Transactions will now be able to be cleared in Canada rather than Hong Kong or London, which can be problematic because of time zone differences.
The Bank of Canada and the People’s Bank of China have established a $30 billion currency swap line that will provide emergency liquidity to support Canadian institutions should there be a run on the renminbi.
Koldyk was also pleased to see the establishment of a Renminbi Qualified Foreign Institutional Investor quota of 50 billion renminbi.
It allows Canadian exporters to invest the proceeds of transactions in Chinese securities markets rather than immediately converting them to Canadian or U.S. dollars.
It allows exporters to hedge the foreign exchange.
“You start to add all these things up and of course it starts to mean a lot, especially on a large transaction,” he said.
Koldyk expects Chinese customers to start demanding that transactions be denominated in renminbi once the currency hub is established.
He believes the Chinese government will put pressure on state owned enterprises to do contracts in renminbi because China wants its currency to become one of the main currencies used in world trade.
Koldyk thinks the hub will help expand the customer base for Canadian agricultural exporters because it is easier for some Chinese customers to arrange things such as lines of credit if the deal is done in their own currency.
It should also help reduce foreign exchange risk, which is built into the price of contracts.
The hub will make Canada more competitive with other countries that already have one, such as Britain, South Korea, Australia, France, Germany and Singapore, and it will give Canada a leg up on exporting nations that don’t have one.
Canadian agri-food exports to China are already impressive, growing by 12.5 percent per year over the last decade.
sean.pratt@producer.com
