The increasing ease of conducting business with China and the development of new products in the offshore renminbi (CNH) markets are driving usage of the renminbi (RMB) as a trade settlement currency.
In the past couple of years, China’s policymakers have continually simplified policies and processes to ease the way for global corporations conducting business with China. Among the key initiatives have been:
- A significant reduction in the requirements for trade documents, including the bill of lading and invoicing, to support RMB receipts and payments: A few key benefits for overseas corporations have resulted from this change. Firstly, the administration of a labour-intensive process has eased, allowing the redeployment of resources to more value-added tasks. Straight-through processing (STP) with RMB payments is now within reach for international corporations and their treasuries. Secondly, treasurers can now have more accurate cash flow forecasts with the closing of the gap between when funds are assessed and when they are released by Chinese corporations. Previous challenges, whereby payment for a 180-day invoice could only be received on the 190th day for one payment and on the 195th day for the next, made it difficult for treasurers to manage cash flows. With the changes however, forecasts can be more accurate and improved cash management practices applied.
- Procedural simplification supporting payments-on-behalf-of (POBO) or receivables-on-behalf-of (ROBO) structures: Such structures, used to support intercompany trades, are now generally acceptable under the RMB cross-border settlement pilot scheme, which was launched in July 2009. Banks such as JP Morgan can typically advise on the procedures and due diligence required in China for application of POBO/ROBO models.
- Intercompany lending: In late 2012, the People’s Bank of China (PBOC) began permitting corporations (on a case-by-case basis) to perform intercompany lending between their China and overseas entities. This allows for overseas entities to more effectively deploy cash built up from successful operations in China to other entities within the group and to aid working capital management.
Development of the CNH market is also driving usage of the RMB. Corporations can now manage their foreign exchange (FX) exposures via the deliverable forwards market, instead of relying on traditional non deliverable forwards. This allows for treasurers to manage their underlying positions in RMB versus US dollars (USD). To quote an observation made in the recent Bourse Consult paper for the City of London’s RMB initiative: “Trading in non-deliverable FX products is currently running at significant levels, but this business is expected to shift to deliverable products as currency controls are eased. This will considerably boost volumes in spot and other deliverable products. There are signs that this trend may be underway.”
Opportunities for Growth and Internationalisation
As momentum in the internationalisation of the RMB picks up, so the impetus will strengthen for corporations to use RMB for settlement, and capture the opportunities offered by the internationalisation programme. Both international and Chinese corporations seem poised to gain:
- International corporations: Beyond the obvious plus of access to more buyers and suppliers in China, the switch to RMB can present companies with the opportunity to review and concentrate foreign exchange (FX) management with established hubs and potentially benefit from economies-of-scale. In addition, there may be opportunities to review contracts and renegotiate pricing and payment terms.
- China corporations: For Chinese corporations, dealing in RMB removes the burden of managing FX risks and presents an opportunity to price more competitively and access more buyers in overseas markets.
Ready for RMB Settlements
With RMB internationalisation maintaining its momentum and the many opportunities for companies inherent to the scheme, building RMB into regional and global treasury processes seems inevitable. For a treasurer, preparedness is key. Any reactive application of risk management practices, just as vendors or customers are settling their trades in RMB, may be a step too late. In short, now is the time to review preparedness for invoicing in RMB.
Some key considerations for companies in evaluating their position and RMB preparedness include:
- Value and frequency of flows with China: Significant trade flows with China will determine if an RMB account is required or if settlement can be managed reactively.
- RMB account location: One consideration would be the treasurer’s strategic intent as regards the centralisation of currency accounts; in which case a fungible location such as Singapore, Hong Kong or London might fit the bill. Another consideration is proximity: is the treasurer’s priority to set up within easy access of regional treasury staff for optimal client service support? A third key consideration is funding and how the treasurer plans to fund RMB payments. Would the location make economic sense in securing funding to support trade transactions? Unless corporations are reviewing investments into local RMB products, the establishment of multiple clearing systems should not affect the decision for account locations.
- FX strategy: Currently, different forward points apply for CNH versus Chinese yuan (CNY) contracts, and hedging in China is subject to regulatory and documentation requirements. The RMB internationalisation scheme is offering up options and flexibility for corporates to incorporate RMB in their existing FX policies and procedures.
- Trade financing needs: RMB Letters of Credit (LoC) can now be issued in the name of the overseas company, which can effectively improve Return on Equity (RoE).
- Promoting the company’s ability to receive/pay in RMB: Communication to trading partners and internal procurement/sales functions to ensure that the right dialogues take place and flows can be managed appropriately from programme initiation is a critical, but often missed, best practice.
In conclusion, it pays for treasurers to be prepared and start leveraging opportunities for process and pricing improvements from settlement in RMB.
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