According to HSBC’s head of global payments and cash management for China, Wong Kee Joo, a key challenge for corporates in China has been achieving better utilisation of surplus liquidity. The good news is that there are new solutions to optimise excess liquidity and many corporates are making full use of them. The concept of ‘trapped cash’ is thus becoming something of a misnomer.
Alternatives for using liquidity include paying dividends, reinvesting in China or engaging in renminbi (RMB) cross-border lending pilot schemes. In parallel with these schemes, Regulation 59, promulgated recently by the State Administration of Foreign Exchange (SAFE), enables foreign currency cross-border lending, so corporates can take surplus foreign currency onshore and lend it offshore.
Another scheme is offshore financial guarantees, whereby corporates pledge their surplus onshore RMB, get a standby letter of credit (L/C) and utilise this guarantee to get access to cheaper funding offshore. Corporates still need to weigh the consequences of these practices, however, as they can result in taxes or interest expenses. While a number of schemes are still at the pilot stage, Wong expects that activities like lending and cross-border sweeps will have become established as the norm within the next couple of years.
A number of pilots already underway will result in the streamlining and simplification of RMB payments. The People’s Bank of China (PBOC) has a RMB gross-in/gross-out scheme, for example, which has completed its first payment.
An even more important change now underway is development of the China International Payment System (CIPS) for cross-border payments, targeted for launch in 2014. China currently uses the China National Advanced Payment System (CNAPS) for domestic RMB payments. The challenge today is that the formats for SWIFT and CNAPS are different, and processes for cross-border payments are manual. Wong says there is a view that CIPS might undertake the SWIFT format so it can interact with SWIFT’s infrastructure, which will help to automate settlement. There is also an expectation that CIPS will potentially have links with offshore RMB centres in Singapore, Hong Kong, Taiwan, London and other markets.
Wong adds that changes in China are made on a progressive basis rather than as a ‘big bang’, with regulators conducting pilots and analysing results before rolling out new programmes. It is also important to remember that the country looks at any new programme from a China perspective. The result is that what would seem normal in other markets can be a breakthrough from a China perspective. In any event, liberalisation will be unlike other markets because China will continue to have controls as well as regulations to control the flow of funds.
Using RMB for Investment
Initiatives are also underway to enable better usage of the RMB as a tool for investment into China. Before new regulations on the utilisation of RMB for foreign direct investment (FDI) were issued in 2011, corporates still needed to convert their foreign currency to RMB with regulatory approval, which takes time. Consequently, corporates have foreign exchange (FX) exposure while they wait and if the Chinese currency continues to appreciate they may end up not having enough money by the time they need to convert to RMB.
Bringing in RMB would thus result in operational efficiency and lower risk, as corporates can use the funds immediately. Excess RMB funds which are not being utilised can also be invested in onshore deposit products that provide reasonable returns. Processes for using RMB for investment are becoming clearer and more corporates are employing those processes, says Wong, with the result that more than 30% of FDI in China is now in RMB.
Shared Service Centres (SSC)
There has been growth in SSCs, which usually handle multiple legal entities and process transactions including accounts payable and accounts receivable, Wong reports The trend is for corporates to set up SSCs to cater to mainland China, followed by Greater China and then potentially to add in other markets.
Expansion in RMB Trade Settlement
RMB trade settlement has picked up significantly and more than 10% of trade settlement with China is now conducted in RMB. Almost all exporters have the ability to trade in RMB, and as they grow accustomed to using the currency, more are also starting to use it for intra-company transactions. Since trade settlement depends on the business flow, companies that buy local materials in particular want RMB when they sell their products and now may give discounts to purchasers willing to pay in the currency.
New offshore RMB clearing centres, such as those recently launched in Taiwan and Singapore, encourage more pools of RMB liquidity outside of mainland China, reports Wong. Corporates in Singapore that are paying in RMB can use its clearing centre in for payments, for example, and the city state could well become a trade clearing hub for Southeast Asia.
Having new offshore RMB clearing centres such as Singapore’s encourages the growth of new and innovative RMB products, spur incremental flows outside of mainland China and create healthy competition. In Hong Kong, for example, the growth in RMB clearing and funds flow has led to more dim sum bonds and more sophisticated products as well as increased liquidity.
The range of developments outlined by Wong shows how fast RMB internationalisation is taking place. With the process likely to continue, corporates will need to track changes closely to make sure they can take full advantage of the latest market developments.
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