Coinciding with Prime Minister Stephen Harper’s trade mission to China, the Canadian government today announced the signing of a reciprocal currency deal to make Toronto the first offshore settlement centre – also known as a “currency trading hub” – for the Chinese Renminbi (RMB) in North America.
China has already signed similar agreements to trade its currency more freely with Singapore, London and Frankfurt as part of a financial liberalization and economic restructuring plan that includes taking steps to loosen exchange controls and internationalize use of the RMB, perhaps even leading to it eventually becoming a global reserve currency along with the U.S. dollar and Euro. Currently, the renminbi (or Yuan which is the name of one unit of the RMB) is the world’s second most often used currency and is increasingly replacing the U.S. dollar as the trading currency of choice in the Asia-Pacific region.
“It’s a great boon for the Canadian business community, both importers and exporters, because they can now do business in China with the currency and not have to go through multiple financial exchange transactions,” said Stewart Beck, president and CEO of the Asia Pacific Foundation of Canada, a strong proponent of the deal since preliminary talks began in June. According a recent report by the Canadian Chamber of Commerce, the new RMB currency hub could boost exports to China by up to $32 billion and save more than $6 billion in currency conversion costs over the next decade.
Importers will benefit from now being able to purchase renminbi directly at market price using the Canadian dollar rather than having to use U.S. dollars to pay their Chinese suppliers. Eliminating the need to go through multiple foreign exchange transactions (and having to factor in a buffer) when purchasing from China should reduce supply chain costs, increase bargaining power and lead to more favourable and transparent pricing of goods. Exporters will likewise benefit from dealing directly in RMB as many firms in China prefer to use their own currency and can more easily borrow in it, factors that can open the doors to new business and help build stronger trading relationships.