A Milestone in the RMB Liberalisation Journey
by Helen Sanders, Editor
With China continuing to be a major strategic growth market for corporations of all sizes and industries, many participants in BNP Paribas’ 8th Cash Management University were keen to understand the evolving opportunities to manage RMB more efficiently and integrate RMB balances into regional and global liquidity structures. Bruno Francois, Head of Transaction Banking, Greater China, BNP Paribas outlined some of the emerging opportunities, while Astrid Thorsen, Head of Business Intelligence Solutions, SWIFT then outlined some recent trends and statistics. Finally, Thomas Morel, Asia Treasury Director, Veolia and Meena Dafesh, Director of Treasury, Asia Pacific and MEA, Ingram Micro, discussed how they are leveraging opportunities for domestic and cross-border liquidity in RMB. The workshop was moderated by Helen Sanders, Editor, TMI and Director of Asymmetric Solutions.
Mapping the journey
Bruno Francois, BNP Paribas first summarised the history of RMB liberalisation to date, from the launch of the pilot cross-border trade settlement programme in 2009 through to the launch of the China (Shanghai) Pilot Free Trade Zone (SFTZ) in September 2013. He also noted the recent expansion from an area of 29km2 to over 120km2 including Lujiazui, the city’s financial hub and the location of a large number of regional headquarters for both multinational and Chinese companies. In addition, new free trade zones in Guangdong, Tianjin and Fujian were announced in April 2015.
A highlight of this liberalisation journey so far has been the ability to include RMB in cross-border cash pools, as Bruno described,
“In February 2014, entities in the SFTZ were allowed the opportunity to include onshore RMB (CNY) balances in two-way cross-border cash pools for the first time with only limited conditions. Although this ability was extended across China in July 2014, the restrictions are far more stringent.”
He proceeded to outline these opportunities in more detail,
“Specifically, a registered entity in the SFTZ needs to act as the pool header, and only cash flows generated from operating activities (i.e. not borrowed funds) can be included. No approval is required, and flows within the cash pool are not subject to a quota.”
With the recent expansion of the SFTZ, however, a far larger group of corporations are able to take advantage of these opportunities, which is significant given the more onerous restrictions of the pan-China scheme. Bruno continued,
“Entities need to have been incorporated in China for a minimum of three years, with a minimum turnover both in China and globally. In addition, the sweep amounts are subject to a quota.”
He also emphasised that although cross-border cash pooling is a major step forward, its relative advantages need to be considered alongside other liquidity management solutions that are available, such as intercompany lending. For example, cash-rich corporations with large cash balances in China are successfully using cross-border intercompany lending as a way of leveraging cash in China for the benefit of overseas entities. Given that this is already a flexible and straightforward solution to adopt, cross-border cash pooling may not offer additional benefits.
Astrid Thorsen, Head of Business Intelligence Solutions at SWIFT continued by illustrating the increase in the use of RMB as a clearing and settlement currency with rapid growth in corporate demand. SWIFT has an important role to play in facilitating the development of RMB as a world currency. Astrid explained,
“By the end of 2014, SWIFT had a significant customer base in China, with 344 users, including banks, corporates and securities firms. We are also witnessing active community engagement amongst these users, with a variety of member groups within China and active participation in SWIFT Business Forum and Standards Forum, highlighting the recognition of SWIFT’s strategic role in facilitating cross-border flows in RMB. Indeed, since 2010, we have seen substantial growth in SWIFT FIN transactions from China.”
The main payments corridor from China is currently to the United States, with significant SWIFT traffic between China and United Kingdom, Hong Kong and Germany. At the end of 2014, RMB broke into the top five payment currencies globally, representing an increase of 321% over two years. By May 2015, 1,081 financial institutions were using RMB for payments with China and Hong Kong, representing 35% of all institutions making international payments to and from these locations, a 22% increase over the same period.
“The number of RMB clearing centres is also growing. While in the past cross-border RMB flows were cleared in Hong Kong, there are now 14 clearing centres with a clearing bank approved by PBOC, four unofficial centres approved by the local central bank and further centres in progress. The ability to clear RMB in Europe, North America and other parts of Asia, is fuelling RMB internationalisation through the increase in demand from multinational corporations, although Hong Kong remains the top offshore centre by value (72%, April 2015)”.