Embracing the Renminbi: Positioning for Change

The rapid development of China’s currency has been

the
treasury development of recent years – with the renminbi (RMB)
almost unrecognisable since the start of its internationalisation journey in
2009. New developments are occurring regularly, leading some to predict the RMB
will storm into the top three global trading currencies as early as 2015, and
that China could overtake the US and become the largest global economy by 2030.

Yet for this to happen, China must be prepared to surrender its RMB
grip. While China continues to test the water and roll out pilot programmes,
strict regulations remain in place that limit the RMB’s attractiveness to
international corporates and investors – and prevent it from thriving as a
global trading currency.

Nonetheless progress is being made. The
belt on the capital account straightjacket has loosened, with the People’s Bank
of China (PBoC) tirelessly formulating and updating investment and cross-border
options – thus fuelling RMB transaction opportunities.

Certainly,
little doubt remains that the RMB will become a prime currency in international
trade in the medium-to-long term; and banks and corporates alike can no longer
afford to ignore the advancing RMB. For corporates, the increasing volume of
global RMB trade means two things. Firstly, they must have the banking
capabilities to complete a range of documentary foreign transactions in RMB.
Secondly, they are able to quickly and efficiently move RMB across their supply
chains, as well as repatriate RMB funds back to their HQs (which, so far, has
proven a significant problem).

Consequently, it is crucial that
banks maintain an up-to-the-minute understanding of the currency’s progression
and provide guidance and expertise for their corporate customers.

The Story so Far: RMB Trade Settlement

The full
liberalisation of the RMB remains a work in progress, yet despite the
currency’s journey being only part-complete, it is worth catching our breath
and establishing where we are. The impact of the trade settlement scheme since
its introduction in 2009 has been significant. Daily value of RMB trade has
surged to US$120bn from US$34b in 2010, according to the Bank for International
Settlements (BIS). This growth has resulted in Hong Kong – the main hub for RMB
transactions – seeing daily settlement of its own currency, the Hong Kong
dollar (HKD), eclipsed by those of the RMB.

With the extension of the
simplified RMB cross payment scheme (SRCP) across the whole of China, the
current account RMB can be considered near-liberalised – assuming the reforms
are not reversed. The programme was introduced to reduce the extensive
documentary requirements for cross-border payments, and has resulted in
enhanced efficiency and reduced costs, adding to the appeal of the RMB as the
currency for trade.

Certainly, within supply chains involving
Chinese buyers and suppliers, corporates are already exploring the use of RMB.
Corporates able to offer such capabilities can not only steal market share, but
also take advantage of pricing benefits.  Adopting the currency for trade can
present lower transaction costs and supplier discounts as a result of the
reduced foreign exchange (FX) risk for the Chinese counterparty. For many large
companies familiar with managing exchange risk efficiently – more so than their
smaller suppliers and buyers – using the RMB and taking on the exchange risk
can offer more pros than cons. This, of course, also acts as natural hedging
for companies running two-way trade.

In fact, the RMB has now
catapulted into the top eight world trading currencies with a market share of
1.49% in August (climbing from 11th place in January 2012 – with a 0.92% market
share – and rankings of 17 and 20 in 2010 and 2007 respectively), further
evidencing this huge shift in global markets.

For corporates, this shift
offers new business opportunities in the Chinese market, with Chinese companies
displaying an increasing interest in conducting their business transactions in
RMB to mitigate currency risk. Yet to capitalise on this, corporates with
Chinese dealing need assistance.

The key here is to choose a
banking partner that can offer the complete scope of documentary foreign
transactions in RMB; including the opening and settlement of letters of credit
(LCs), the settlement of collection and the issuance of bank guarantees.

Liquidity Management: An Expanding Currency Requires Expanding
Capabilities

Of course, the ongoing RMB developments impact
not only trade, but also liquidity management. Though the capital account
remains tightly restricted, thus presenting major obstacles to corporate, the
Chinese government is adapting its regulations to increase the RMB’s
flexibility. The People’s Bank of China (PBoC), for instance, took action to
increase its border porosity by updating its cross-border inter-company loan
pilot scheme, allowing corporates in mainland China to make temporary transfers
via loans to their overseas affiliates; providing a solution (albeit short
term) to the issue of trapped cash. This has recently been extended to
incorporate the whole of China.

Elsewhere, for corporates issuing
debt, offshore ‘dim sum’ bonds have been created. Indeed, funds raised in the
offshore renminbi (or CNH) market offer one of the most straightforward ways to
fund investment in mainland China. These developments are increasing the RMB’s
liquidity. And as global RMB transactions grow, both in volume and in
capabilities, players in the Chinese market will require expertise that can
cater to their expanding liquidity and more complex supply chain requirements.

Being Alert to Reforms

Certainly, the
RMB’s progression towards becoming a currency as familiar as the US dollar
(USD) or euro is a matter of when, not if. Corporates and financial
institutions (FIs) therefore cannot afford to be complacent. With each new
regulation and amendment, the RMB is becoming more accessible and attractive as
a trading and investment currency, and corporates must be positioned – through
their banking partners – to capitalise on every opportunity. It is therefore
imperative that FIs are RMB-ready.

In order to provide the
facilities and service for corporates to unleash the RMB potential with every
step of its development, banks must have a strategy with preparation and
proactivity at its core; simply reacting to developments is not enough. It is
vital that FIs maintain a close relationship with regulators, attaining the
latest information and being ready to act. By offering cutting edge solutions
and advice to clients, corporates can trust that their banking partner is
positioned with the expertise and capabilities to provide the support that will
enable them to grasp new RMB opportunities from the outset.

Given
the complexity of the rapidly-emerging regulations, having a banking partner
with a presence in mainland China is also a critical element for remaining
up-to-date and to understanding the significance of the changes underway. Banks
must equip clients with access to every opportunity available from this new
global currency. As the RMB picture takes shape, the sector should lead RMB
product innovation, allowing banks and corporates to capitalise on this
prospering market.

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