Liberalisation initiatives have frequently begun as pilot programmes, based on approved lists of companies or specific cities or provinces. Uncertainty over the pace and extent of change has prompted many institutions to adopt a wait-and-see approach .
In July 2009, for example, the People’s Bank of China (PBOC) initially allowed 365 enterprises in China to use renminbi (RMB) settlement for cross-border trade. The list of approved companies was then expanded over time. During the pilot phase it was difficult for international companies making payments in China to ascertain whether their suppliers met the pilot criteria. Finally, three years later, a milestone was reached when the pilot was expanded so that all corporates in China could settle cross-border trade in goods and services using RMB.
Another more recent pilot is the Shanghai Free Trade Zone (SFTZ), launched in September 2013. While the creation of the SFTZ is in line with China’s liberalisation agenda, the rules around it are still being defined.
Further confusion has resulted from the existence of onshore renminbi, known as CNY (the only currency code recognised by SWIFT for payments) and offshore renminbi, known as CNH. The two currencies have different values as CNY trades within a tight band determined by government policy while CNH is more freely traded in the offshore centres of Hong Kong, Singapore, Taiwan and London.
Advantages of RMB Liberalisation
The liberalisation of the RMB is undoubtedly a seminal event in the modern history of China. However, for corporates, financial institutions (FIs) and public sector bodies that buy and sell goods and services in China, it is important to understand its practical relevance to their activities.
In the short term, liberalisation matters because increasing global use of RMB could enable corporates to reduce costs associated with their imported goods and services, improve their terms and conditions, and widen the choice of suppliers. In the long term, failure to adopt RMB could therefore put international companies and others at a competitive disadvantage. In 2010, just 1% of trade flows were denominated in RMB. According to the PBOC, at the end of 2013, approximately 20% of trade (RMB2.94 trillion or US$485bn) was RMB-based. At this current rate of growth, half of China’s trade will be settled in RMB by 2020.
The potential benefits of using RMB depend on a company’s level of engagement in China. For multinational corporations (MNCs) with trade flows with China, paying local suppliers in RMB rather than an international currency may make it possible to negotiate improved trade terms because foreign exchange (FX) risk is eliminated for the Chinese exporter. Historically, many Chinese suppliers have included a buffer to accommodate FX fluctuations, or have sought to renegotiate terms as the FX rate changed. Paying in RMB can therefore offer the MNC greater pricing transparency and potentially lower costs.
In addition, by paying in RMB multinationals gain potential access to a much wider range of suppliers and business opportunities in China, especially small and medium-sized companies that may naturally prefer to settle in their home currency.
It is important to remember than China is not just an export economy but also one of the world’s largest importers, especially of raw materials and commodities. MNCs outside of China may accept RMB from their Chinese importers and leverage offshore centres in Hong Kong, Singapore, Taiwan and London, to exchange RMB for other currencies. Chinese importers can also use their RMB liquidity onshore to fund cross-currency payments globally.
Despite the broadening of many pilot schemes in China, the regulatory environment remains complex and continues to change. To navigate this challenging – but rewarding – landscape, it is essential for firms to work with a trusted advisor that can offer them appropriate guidance and support.
Specifically, a banking partner must have proven experience, deep knowledge, and an on-the-ground presence in China, as well as a strong relationship and an ongoing dialogue with regulators. Equally important is a broad range of solutions to meet the evolving needs of clients at various stages of engagement with China.
Global payments solutions, which include the proprietary Citi WorldLink® Payment Services, enable clients to make cross-currency payments in RMB, funding in a range of currencies, and leverage intelligent distribution to pay both corporates and individuals, which can be more challenging to reach in China. With a trusted advisor, clients can be confident that payments reach the beneficiary securely and comply with local regulations.
Expert advice enables firms that are active in China to make an informed decision on how to take advantage of RMB liberalisation in a way that maximises the opportunities available. Regardless of which banking partner is chosen, it is essential to ensure they can provide the on-the-ground local expertise and experience required to navigate and advice on this developing opportunity.
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