Learning the RMB Game
by Helen Sanders, Editor
The weekend that has just passed has reminded me why I am not that interested in sport. In one weekend we have had two Wimbledon finals (which I quite like and sadly had to turn down the opportunity to go to the ladies’ final), the British Grand Prix (rather more successful for the home crowd), the Tour de France in the UK (I don’t know why either), all on top of the soccer World Cup. There are many thousands of children around the world (and indeed their parents too) who dream of holding up a trophy in their chosen sport with their respective national anthem played in acknowledgement of their success. While international success will always be the privilege of a few, it is impossible to win without taking part. I’m sure there are many treasurers reading this who are proud of their past or present sporting prowess (achievements under the age of 10 don’t count); however, treasurers are sometimes a little more reluctant to learn a new game. Today, the game that every treasurer needs to learn to help their company to win is managing RMB. While the rules may be changing fast, the rewards can be substantial.
A steady state
For treasurers, it should be something of a relief that China is no longer experiencing the double-digit growth spurt that it enjoyed in the 2000s. While quarterly growth remains volatile, the annual growth rate is now a more consistent, but nonetheless attractive 7.5% (source: World Bank). For foreign multinationals, greater stability lends itself to a longer-term sustainable business strategy; furthermore, companies that have been cautious that rapid growth could lead to a boom-bust cycle can now approach their investment in China with more confidence. Slower (but potentially more sustainable) growth is also motivating the Chinese government to pursue its financial liberalisation programme with more vigour, which is translating into significant new opportunities for treasurers of both Chinese and foreign multinationals.
According to the World Bank’s June 2014 China Economic Report, China’s output grew by 7.7% in 2013, matching its 2012 growth rate and exceeding the government’s 7.5% indicative target (figure 1). In the same report, the World Bank predicts that China’s growth will continue to moderate over the medium term (7.6% and 7.5% in 2015) as structural shifts become more evident.
Key to maintaining this growth is facilitating business enterprise, particularly amongst Chinese corporations. This has been a primary driver behind initiatives to facilitate international use of RMB, both for trade and investment, and liquidity management, such as cross-border intercompany lending. However, these opportunities benefit not only Chinese corporations seeking overseas expansion but also foreign multinationals doing business in China.
RMB: the default trade currency?
Although the ability to settle cross-border trade in goods and services in RMB was first introduced in 2009, adoption was relatively limited initially (apart from intercompany trade) until the scheme was opened up to all companies and regions in China. As Vina Cheung, Global Head of RMB Internationalisation, HSBC Payments and Cash Management, highlights,
“Since July 2013, cross-border RMB trade has been simplified and available throughout China, which is very encouraging for both importers and exporters and a key milestone in the development of cross-border trade.”
Cross-border trade and currency liberalisation is advancing rapidly in China.
Sandip Patil, Managing Director and Region Head, Global Liquidity and Investments, Asia Pacific, Citi Global Transaction Services, emphasises some of the advantages of using RMB for cross-border trade,
“The advantages of RMB cross-border trade settlement for foreign multinationals include better commercial conditions (as counterparties’ FX risk is eliminated), greater flexibility in managing cash, liquidity and risk within China and access to a wider community of buyers and/or sellers. Documentation is less onerous when using RMB rather than foreign currencies, accelerating the trading process, e.g., export reporting and payment terms can also be more attractive: up to 210 days when using RMB compared with 90 days in foreign currency, resulting in obvious benefits.”
A growing number of companies (both Chinese and foreign multinationals) are recognising these advantages. According to SWIFT, RMB is now the second most used currency (for cross-border payments with China and Hong Kong – SWIFT RMB Tracker, June 2014) after USD and ahead of HKD. In May 2014, 12% of cross-border payments with China and Hong Kong were conducted in RMB, a year-on-year increase of 36%. Julien Martin, Head of RMB Competence Centre, BNP Paribas, emphasises the significance of this growth,
“Cross-border trade and currency liberalisation is advancing rapidly in China. The government’s target is that one third of cross-border trade should be conducted in RMB by 2020, and we have already passed 20% in 2014. The next important milestone will be the ability to use RMB to purchase commodities and there are already initiatives in progress to achieve this for vital commodities such as oil and metals.”