The Birth of RMB Cross-Border Trade Settlement
by Neil Daswani, Regional Head Transaction Banking, Northeast Asia,
Standard Chartered Bank
International trade is not a new phenomenon, neither for western nor eastern economies. The ancient Egyptians traded with Afghanistan for precious lapis lazuli, the Phoenician sea trade routes extended as far as India more than 2,200 years ago. The Silk Road created an overland network joining cities in southern Europe with Arabia, Somalia, Egypt, Persia, Pakistan, India, Bangladesh, Java, Vietnam, and China. Since the early 20th century, however, with the emergence of ever more efficient technology, communications and transportation, together with unprecedented manufacturing and consumer demand, global trade has been transformed. The rise of the United States has been a major factor in this transformation, not least in the creation of the post-war agencies, such as what is now the World Trade Organisation, whose predecessor, GATT, was the result of the Bretton Woods Conference in 1944.
The emergence of a new world currency
After the Second World War, with European economies in tatters, the USD replaced the gold standard as the international reserve currency and became the trusted currency for international trade. Although the Bretton Woods system collapsed late in the 1960s, the USD remained the international trading currency in the absence of any realistic alternatives at that time. Today, although EUR and GBP are commonly used for international trade, the USD remains the trading currency of choice in many parts of the world, including trade with, and amongst countries in Asia. For China, as the second largest exporter in the world and third largest importer (WTO, 2007), with $2.5tr in 2008 in combined exports and imports, creating the optimum conditions for exporters and importers has become a major priority. The need to trade in USD, however, is potentially a major hindrance for both Chinese companies and their international trading partners, not least due to restrictions on the convertibility of RMB. However, at the same time, the Chinese government and central bank are keen to avoid deregulating the market to the extent that the currency is put at risk through speculation.
The pilot scheme takes shape
In 2008, to address the competing challenges of supporting cross-border trade whilst not allowing currency issues to create additional risks for companies in China, Premier Wen Jiabao announced a pilot scheme to enable RMB cross-border trade settlement to take place with approved entities in Hong Kong and Macau, that have to demonstrate that they have had genuine trade transactions with eligible enterprises, as outlined below. This scheme has since been extended to include the ASEAN countries (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam). Eligible companies covering exports and imports by Mainland Designated Enterprises (MDEs) in five cities in China (Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai) are able to take advantage of the scheme. RMB trade can be two-way, including trade both conducted on open account and using documentary credits such as letters of credit. In order to open an account, companies must demonstrate that they have genuine trade transactions with MDEs.
The pilot scheme took shape during the first half of 2009, with the initial guidelines and detailed rules published in early July 2009. Two days after the publication of the People’s Bank of China Shanghai’s initial draft of the Operational Guidelines for Cross-Border Trade, on July 10, 2009, Standard Chartered Bank became the first international bank to conduct end-to-end cross border RMB trade settlement transactions. At the end of August 2009, Standard Chartered Bank (China) was the first foreign bank to be awarded the Settlement and Agent Bank licence.