For companies doing business with China, or competing for a share of its growth, the renminbi (RMB) should now become an integral part of their cash management strategy and offers an effective way to settle trade, make investments and deepen relationships.
If that sounds like a bold claim for a controlled currency, consider how far China has opened itself to the world in a short span of time. Global trade with China has grown rapidly over recent decades, pulled forward by the twin locomotives of extraordinary Chinese domestic growth and increasingly transnational industrial assembly lines. HSBC research indicates that Chinese gross domestic product (GDP) is set to increase by 8.6% in 2013, and next year China will add more to global economic growth than ever before.
Meanwhile, China has been loosening controls on the RMB to establish it as a global trade currency and, eventually, a global reserve currency. The group’s research shows that about 10.5% of China’s trade, worth more than US$400bn, is currently settled in RMB. HSBC expects that share to rise to more than 30% by 2015, equivalent to about US$2 trillion, as companies and their treasurers become increasingly aware of the benefits of invoicing and settling in the Chinese currency.
So what are the key benefits and why should corporate treasurers and chief financial officers (CFOs) care about the internationalisation of RMB?
Treasury Benefits of Liberalisation
Through a combination of RMB trade settlement procedures and foreign exchange (FX) hedging, companies may reap considerable savings from the increasing liberalisation of RMB controls.
In the past, Chinese suppliers have typically needed to add a buffer of between one and three per cent to their quotes to hedge against unfavourable exchange rate movement before a trade settles. By settling in the Chinese supplier’s currency, businesses may now be able to avoid this additional cost. In fact, an HSBC survey of Chinese companies involved in international business showed that 41% were willing to consider discounts of up to 3% on RMB-denominated settlement, while 9% were ready to give even larger discounts.
Global Footprint, Lower Funding Costs
Although the RMB’s life as an international currency only began in 2009, its rapid development has been helped by rapidly decreasing restrictions. The remaining RMB restrictions are focused on investment flows into and out of the capital account, rather than on trade.
Here too though, regulations are being relaxed. Between 2011 and 2012, the share of China’s inbound foreign direct investment (FDI) conducted in RMB leaped from 12% to 35% as multinational corporations (MNCs) recognised the benefits of centralising their treasury operations offshore and using China’s currency for local capital injections. Today, developments in cash management regulations mean that investments in China can increasingly be treated as they would in any other market, allowing funds to be deployed efficiently and conveniently.
For example, major banks can enable a customer to use RMB to settle cross-border payments and collections on a gross-in, gross-out settlement basis with the parent company’s overseas treasury centre, which can then be settled directly with the counterparty through a payments factory or shared service centre (SSC).
Before this each transaction had to be settled on an individual basis directly with the counterparty; increasing transaction costs, currency risk and fragmenting payment processes for treasuries. This new approach allows for the management of foreign exchange (FX) exposures, optimises liquidity management for the company, and sets a precedent for other MNCs that will ultimately help boost circulation of RMB outside mainland China.
The benefits to both Chinese and foreign corporations in China are clear: payment processes can be conducted more promptly and efficiently, and can be centralised into a payments hub or SSC more easily. Further, payment timing can be predicted more easily, enhancing working capital and cash flow forecasting.
We are witnessing an acceleration in China’s financial liberalisation, with profound impacts on cash management. Treasury management solutions involving RMB are evolving quickly, albeit on a pilot programme basis. A catalyst for this has been the need to include excess RMB balances in China with a company’s offshore RMB pools, in locations such as Hong Kong, Singapore and London, to optimise internal regional and global treasury management structures. Hence, HSBC anticipates new pilot projects for RMB cross-border sweeping in the near future, as part of China’s continued development objectives for RMB to become an international currency.
Hong Kong has played a leading role in the global expansion of RMB and remains the largest, best developed offshore market. China is in the process of widening the network of clearing centres outside the mainland.
China International Payment Scheme (CIPS): Global Liquidity
As the pool of RMB liquidity grows in locations outside China, the need for an offshore clearing mechanism to facilitate RMB transactions increases. For example, Singapore could become another RMB clearing centre for Asia, in addition to Hong Kong, and London for Europe.
These international clearing infrastructures could be linked when the new RMB international payment system in China, the China International Payment Scheme (CIPS) is rolled out, anticipated as happening by late 2013. This will be based on SWIFT standards, including ISO 20022 formats and International Organisation for Standardisation (ISO) currency codes, facilitating straight-through processing (STP) and greater international cohesion.
New Suppliers, New Consumers
By adopting RMB today, companies can build strong relationships with a wider network of Chinese partners. Because the RMB is convenient for Chinese counterparties, importers who use it potentially open themselves up to a new layer of Chinese suppliers who may prefer the ease of using their own currency, or who may be reluctant to take on dollar exposure because their cost base is denominated in RMB.
What’s more, it may pay a relationship dividend for those looking to sell into China. Being an early adopter of RMB in your treasury can help secure market share as competitors jostle for position in one of the world’s fastest-growing consumer markets. HSBC research suggests that between now and 2050 the average Chinese worker’s income will increase seven-fold, from around US$2,500 to about US$18,000, giving some sense of the potential for growth this market holds.
Corporate Treasurers can Contribute to Liberalisation
Financial liberalisation is set to continue as we move towards realising the Chinese government’s ambitions for RMB to be a leading currency offshore and for cities such as Shanghai and Beijing to become major international financial centres by 2020.
Regulators are not pursuing this strategy in isolation, however. The collaborative nature of the pilot schemes, including the regulators, banks and corporate customers, means that treasurers have an important role to play in shaping financial liberalisation and prioritising new developments. It is important that treasurers remain up-to-date, not only with new opportunities to enhance their cash and liquidity management position in China, but also in understanding which pilot projects might be relevant to their business. By becoming involved in pilot projects, companies can help to shape new developments and gain early advantage.
In short, the evolution of RMB now represents an opportunity for companies to cut costs and improve financial flows. Ultimately, it may also be a way to start new business relationships and to tap a vast pool of aspiring customers. That’s no small achievement for a currency still new on the international stage.
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