Until recently, many mid-market corporates were daunted by the prospect of settling trade transactions with Chinese counterparties in RMB – in 2014 more than 90% of these businesses were still conducting their Chinese business in US dollars or euros (USD/EUR). Much of this reluctance stemmed from the fast-changing, complex regulatory environment surrounding RMB adoption.
Yet, as Europe’s trade with China increases – and Chinese companies obtain increasing bargaining power – such reluctance may prove costly; damaging trading partnerships and long-term growth strategies. It is evident that an increasing number of Chinese companies prefer to be invoiced in RMB in order to eliminate currency risk. As such, European companies can build and strengthen new and existing relationships with Chinese counterparts by being able to offer invoicing in their local currency. In addition, by bearing the exchange rate risk and reducing administrative costs for their Chinese counterparty, middle market companies may also be able to negotiate better trade terms or seek a discount on goods or services purchased.
Fortunately, many of the barriers to mid-market companies settling in the Chinese currency are falling down. A key recent development has been the establishment of offshore clearing hubs in Europe, enabling businesses across the continent to settle trade in RMB through their local bank in their own time-zone. Therefore, switching to settling in RMB should no longer be as great a challenge, given on-the-ground local advice and a full range of global banking services available to help companies manage the RMB as they would any other currency.
Offshore Clearing Hubs Simplify RMB Access
Certainly, the introduction of the offshore clearing hubs is considered a breakthrough for the middle market, allowing trade to be settled in RMB outside of Chinese borders. There are now 14 globally: Australia, Canada, France, Germany, Hong Kong and Macau, Japan, Luxembourg, Malaysia, Russia, Singapore, South Korea, Switzerland, Taiwan and the UK
Germany won the race to become the first European country to appoint a RMB clearing bank, The Bank of China, in March 2014. The Frankfurt clearing hub subsequently became operational last November, with London, Luxembourg, Paris and Zurich following hot on its heels.
The location of the RMB clearing hubs in Europe is particularly significant for European mid-market exporting firms – for example German machinery producers, which export high volumes of goods to China – because it enables them to take advantage of local expertise in their own time-zone without the language barrier. With Frankfurt a natural choice for the European RMB market (given that it is the most important banking location for trade settlement business with China) mid-sized companies no longer have to approach banks in Hong Kong for RMB clearing, which has often proved challenging for those companies without previous experience of doing so.
Furthermore, the European clearing hubs should not only make accessing the RMB simpler but also reduce costs, given that the hubs allow local banks to convert EUR directly with the Chinese currency without having to first convert into USD.
In addition, having the ability to actively manage cash management and currency risk from local offices in Europe should also help increase the control mid-market firms have from a treasury perspective – allowing them to tap well-established local trade financing tools and payments infrastructure, ultimately removing the need for a long arm into China. What is more, an offshore account provides the most options for hedging currency risk, with a broad range of currency instruments available and attractive money market yields for offshore RMB deposits (>3% p.a.).
As such, RMB adoption is now beginning to take off among mid-market companies in Europe and new business opportunities are opening up for this segment in China. Over the past 12 months, Commerzbank have seen demand double for basic products, such as RMB account opening and payment transactions. This increased demand extends to other products, such as those relating to forward transactions.
Seizing New Opportunities
With the RMB recently breaking into
the world’s top five most-used currencies
according to SWIFT, it is well on its way to becoming a leading global currency. As such, the key takeaway for middle market exporter companies sizing up the opportunities in China should be: RMB adoption need not be daunting and incorporating the RMB into their currency mix now will mean they stay ahead of the curve.
Yet in order to do so, middle market businesses need to be aware of the latest developments in the RMB’s internationalisation and the changing regulatory environment. However, this can often prove challenging without the experience and contacts, as well as the treasury and legal infrastructure, of larger multinational corporations. In this respect, treasurers need to consult an advisor that not only has a trusted, local presence at home in Europe – and can reduce the complexity of their currency risk management – but one that also has a strong onshore presence in China too.
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