Chinese shipping companies switching to RMB for transactions

SINGAPORE: More Chinese shipping companies are asking for renminbi (RMB) to be used as the settlement currency for shipping freight rates.

The shipping sector is seeing growing usage of the Chinese currency.

To help Chinese shippers manage their exposure, major shipping broker, Freight Investor Services, has even launched a freight derivative in Chinese Yuan last month.

A forward freight agreement (FFA) allows ship owners, charterers and speculators to hedge against the volatility of freight rates.

It gives contract owners the right to buy and sell the price of freight for future dates.

FFAs are built on an index composed of a shipping route for tanker (ship) or a basket of routes for dry bulk, contracts are traded “over the counter” on a principal-to-principal basis and can be cleared through a clearing house.

International settlements in renminbi have been on the rise.

Beijing has been promoting the wider use of its currency globally through bilateral currency swaps and trade settlement deals.

Global transaction services organisation SWIFT noted a 24 per cent surge in Yuan settlement in November 2012 as compared to a month before.

Shipowners like First Ship Lease Trust Management said it is a natural development for charter rates to shift from US dollars to renminbi as a significant volume of goods being transported is also priced in Chinese Yuan.

Guy Broadley, director at Freight Investor Services said: “China’s involvement in the commodity story over the last 10 years is obviously been very great… last year, China’s dry bulk commodity imports were equivalent to about 44 per cent of global seaborne trade. We feel that it is important for Chinese traders to be able to hedge that price risk by having a RMB-denominated contract.”

But shipping analysts believe this trend is limited to small and medium-sized Chinese shipping companies, which transact the bulk of their trades domestically.

Jayendu Krishna, senior manager at Drewry said: “China has a lot of restrictions in terms of foreign currencies and because of the restrictions they are not really able to trade in what exists today is the US-denominated transactions. So, with the introduction of this RMB-denominated FFA, probably more Chinese players will be interested because they are able to hedge against the risk of the freight volatility.”

Currently, most shipping chartering is settled in US dollars.

Shekaran Krishnan, partner at Ernst & Young said: “It would make a lot of sense for them to have the revenue which is the freight revenue in local RMB because it is a natural arbitrage against the cost they have to pay locally and if they have it in local currency, they can avoid the currency fluctuation that they are exposed to.”

Given the limited supply of the Chinese Yuan, analysts do not see the renminbi replacing the US dollar anytime soon, as the shipping industry is still very much a US dollar-dominated business.

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