Exporters and importers operating in China can use the renminbi (RMB) to develop more profitable and sustainable relationships with their Chinese counterparts. The Peoples Bank of China (PBoC) has estimated that corporates can save 2%-3% if cross-border transactions with Chinese counterparts are denominated in RMB instead of foreign currencies.1
For Chinese corporates it is easier to deal with the Chinese yuan than entering a more complex foreign exchange (FX) transaction, which also leads to additional financing costs. In particular, customs validations for incoming foreign currencies may take between one and two weeks to process. Furthermore, Chinese counterparts are faced with higher domestic loan rates and have to pay additional taxes for transactions in foreign currencies. In turn, this may lead to inefficient working capital cycles.
Offering to pay a Chinese trade partner in RMB will lead to advantages for both parties involved, namely better pricing for goods purchased/sold, better payment terms and improved business relationships.
In the wake of the global financial crisis, China took active measures to establish the RMB as a currency for cross-border trade. In 2009 the Chinese authorities launched a pilot scheme to liberalise the RMB, with a specific focus on emerging markets. In 2011 the government expanded the scheme to cover all Chinese importers, followed by mainland designated exporters. Since March 2012, all Chinese corporates have been permitted to invoice their foreign trade business in RMB. Furthermore, the possibility that the RMB could become an international reserve and collateral currency has also been discussed globally.2
Even as the Chinese authorities reduced their restrictions on cross-border RMB payments, their main focus was to avoid speculation and maintain strict guidelines for use of the currency. These restricted onshore RMB payments to and from mainland China, so that such operations are only allowed in connection with an underlying trade transaction.
Case Study: European Commodity Trader
A leading European commodity trader, which exports raw materials to China, used UniCredit Bank for handling a RMB-denominated letter of credit (L/C). The Chinese counterparty could pay the agreed value in RMB on maturity without mark-ups for FX and tax payments. It could also avoid the cost associated with the complex authorisation procedure for foreign currency settlement.
In addition UniCredit Bank, through its Hong Kong branch, forfaited the deferred payment period based on an attractive RMB interest basis. The net proceeds were converted into US dollars. In this way the European exporter immediately received the US dollar counter value of the L/C and the Chinese importer paid in their domestic currency at the original maturity date.
Because of Chinese currency regulations, it is advantageous to use an L/C as a secure payment and financing instrument for all parties involved. In addition, the documents needed for an L/C provide proof of the underlying trade transaction. Beyond the scope of documentary payments, corporates dealing with Chinese counterparties can also receive RMB direct transfers.
As regards to outgoing payments, the sending bank in Europe is responsible for providing evidence of the underlying transaction’s trade character which triggers the payment, in case Chinese or Hong Kong authorities ask for the relevant documentation. For outgoing RMB payments banks must be able to deliver transaction-based documents that prove the trade-related nature of the payment.
Over the past year, UniCredit has monitored the Chinese liberalisation efforts, but also tracked strict counter-measures whenever ‘unusual’ market developments occurred. This makes it advisable to always keep appropriate documentation to evidence the trade character just in case it is asked for. Since UniCredit Bank launched RMB products in June 2011, the related processes have been well practiced and are now part of the bank’s daily business.
Apart from trade-related payments, UniCredit recently developed direct payments for investments, dividends and financings. The Chinese authorities must approve these non-trade-related payments on a case-by-case basis.
The experience of the past few years demonstrates that the Chinese authorities aim to maintain their goal of further liberalisation. Starting from case-by-case authorisations, to a few pilot regions and corporates, they are simplifying the procedures, principally from the perspective of Chinese importers but extending it to exporters as well.
In June 2012, for example, the PBoC in Shanghai piloted outgoing payments with reduced documentary requirements. Shanghai-based corporates may apply to join this programme. The criteria include close and long-term business relationships with a mainland bank’s Shanghai branch, as well as cross-border trade relations which justify the payments.
Irrespective of this progressive approach, the Chinese authorities closely monitor the trade and development/evolution of the currency and interest rate curve of the onshore as well as offshore RMB. They will implement counter-measures if speculation and arbitrage effects appear. June 2012 also saw the authorities compile a list of 9,500 Chinese enterprises, whose payment activities will be supervised in a stricter way to avoid misuse in connection with overseas settlements.4
Currency liberalisation efforts saw RMB-settled trade grow to 10% of China’s total trade in 2011. By the end of this year analysts expect this share to reach 15%, or RMB3.7 trillion.5
Now is a critical time for corporates to prepare themselves for the unprecedented business opportunities in China. Using today’s onshore and offshore RMB possibilities will help pave the way for further liberalisation of the currency.
At the same time China is expected to become the biggest export market for Europe, displacing the US from its top position. Additionally the EU rivals the US as the most important purchaser of Chinese products. Trade volume is expected to amount to more than €1bn a day .
Considering China’s role in world trade, the transaction savings figure of 3% has great significance. This potential will encourage trade partners to optimise their business. Nominating the RMB as an invoice currency will improve customer and vendor relations, which will widen the client and/or supplier base in a growing market.
4 http://www.chinatrade.com/blog/china-to-upgrade-cnaps-for-cross-border-trade; http://www.globaltimes.cn/NEWS/tabid/99/ID/711996/Yuan-takes-another-step-on-path-to-globalization.aspx
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