Thank you, Mr. Chair.
I'm very happy to be here today to discuss Export Development Canada's perspectives when it comes to
the renminbi hub establishment and the internationalization process.
EDC's interest in China's renminbi internationalization process and the establishment of renminbi hubs around the world has grown significantly. We've been especially interested in how the evolution of the renminbi is relevant to Canadian exporters. I'll get to this in a minute.
We've also been active in the renminbi bond market. As you may be aware, EDC became the first Canadian entity to issue a renminbi bond in July 2013, and one of the first sovereigns outside of China to do so. We then issued a second renminbi bond in November of last year. We would be happy to discuss these bonds with the committee, but my presentation is going to concentrate on the practical implications of the renminbi hub for the Canadian export community. In particular, I plan to address the questions that have been captivating many of our clients. These are, first, why the internationalization of the renminbi is an important issue for Canada, and second, how this will actually help Canadian exporters.
On the first question, China's development of renminbi hubs around the world is creating more demand for renminbi denominated trade, and Canadian exporters need to prepare themselves accordingly. It's clear to us that very significant competitors of Canada are already testing the waters on this front. If Canadian companies are not willing to do the same, they could find themselves in a position of competitive disadvantage. It is equally noteworthy that China is one of our most important trading partners. It has already been mentioned, but around $77 billion in two-way merchandise trade is currently happening. That's roughly about 8% of Canada's total trade on an average basis. China stands alone as our number two trading partner, and this means that all of the standard incentives for renminbi denominated trade definitely apply for Canada.
Having said that, we have interviewed Canadian companies, both large and small, about their renminbi strategies. As a general rule, the large companies are aware and quite cognizant of the benefits. We're more concerned about the preparedness and awareness of small and medium-sized enterprises, which clearly do not have as many resources to devote to the latest foreign exchange strategies. The risk here is that Canadian small and medium-sized enterprises could be caught off guard by a rising renminbi, and wind up losing their competitive edge.
Fortunately for them, we have not yet seen a significant shift to renminbi denominated real economy business. One of the key reasons for this is that global value chain financing practices are very U.S. dollar centred. Even in China, Chinese simply can't switch to renminbi denominated trade without repercussions, given the way that trade is organized at the moment.
Another reason that Chinese companies have preferred to conduct business in U.S. dollars until now is rooted in the relatively cheap U.S. currency, although we see that in the last little while that is evaporating. As the U.S. is leading the charge in the rest of the world, their structural strength and a number of other factors are leading to an appreciation of their currency.
Those are all reasons that this is important to Canada. How this will help Canadian exporters, I will summarize very quickly inside of six key points.
First, the establishment of the Canadian renminbi hub will allow our exporters to access a wider universe of Chinese importers.
Second is the awareness effect, both the effect of the awareness of the establishing of the hub on Canadian businesses large and small, and also awareness in China of Canada having actually made the advent of this, and thus increasing our visibility in that market.
Third, the hub should also stimulate the development of a more robust renminbi derivatives market in Canada, which will allow Canadian companies to more effectively hedge foreign exchange risk.
Fourth, hub agreement included an RQFII quota. This is an important detail that will allow Canadian institutional investors the ability to access China's onshore securities market and thus expand the menu of renminbi denominated investment options which would help to further deepen Canada's renminbi liquidity pool.
Fifth, the establishment of a clearing bank in Canada will help to reduce foreign exchange fees and make renminbi denominated transactions more cost-effective.
Sixth, there is evidence, although it's anecdotal, of discounted transactions for those actually using the renminbi.
What this all means is that renminbi hubs in Canada, Asia, and Europe are rewriting the rules of engagement and in the process altering the demand structure for renminbi business, which is not going to change overnight, but it is changing. We are hoping that in this case Canada can be ahead of the curve. It certainly pays to be ahead of the curve.
Thank you.