Published: November 01, 2009
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.
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.
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.[[[PAGE]]]
There has inevitably been a great deal of interest in the RMB cross-border trade settlement pilot scheme, amongst both companies in China and their overseas trading partners. The range of industries that have been attracted to the pilot scheme range widely, and initial concerns that the scheme would simply be a means for state-owned enterprises to compel counterparties to accept payment in RMB has been far from reality.
For corporates in China, the scheme enables them to eliminate FX risk, to reduce transaction costs, to receive and provide transparent pricing, and to align their international and domestic activities, increasing efficiency from a cash management, technology and accounting perspective. Overseas businesses can become more competitive to customers in China, particularly as any FX costs can be stripped out of pricing, and seek better terms from Chinese suppliers. For those conducting two-way trade, transacting in RMB creates a natural hedge, as well as reducing reliance on USD. Furthermore, we would expect offshore demand for RMB to increase significantly as the currency becomes increasingly liberalised.
In addition to the cash and risk management benefits to both domestic and overseas firms, the RMB cross-border trade settlement pilot scheme is helping to improve the efficiency of the transaction process. Prior to the scheme, and for those entities not yet authorised to trade within its terms, there are a variety of additional procedures. For example, documentation can be time-consuming to prepare, and verifying receipt can take a number of days, involving various regulatory bodies.
By using RMB cross-border trade settlement, existing processes can be streamlined, with no need to suspend funds in EFV (Export Funds (subject to) Verification) – this is the SAFE requirement that foreign currency proceeds resulting from export trade from China should be credited to a special EFV account for verification before being credited to the exporter’s account, with the resulting working capital efficiencies. The documentation burden is reduced, with no need to reconcile the He Xiao (documentation) with customs, and tax rebates can be claimed earlier.
Since the first RMB cross-border trade transaction in July 2009, there has already been substantial progress and expansion in the pilot scheme. In particular, the number of MDEs has grown rapidly, a trend which is certain to continue. Furthermore, we would expect companies in a larger number of cities to be eligible, so that these cities are able to remain competitive. (As the pilot scheme progresses, and the Chinese authorities become more familiar and confident with the customs validation process, we would also expect to see the number of countries in which MDEs can be established increase, including potentially other large trading partners such as Korea and Japan.) Beyond that, it is not unrealistic at some stage, once proof of concept has been firmly established, to expect opportunities for RMB trade to extend eventually to Europe and North America.
For companies seeking to take advantage of the RMB cross-border settlement scheme, there are a number of considerations to ensuring that it is implemented successfully and delivers the advantages that both importer and exporter anticipate. Key to this is to select the banking partner best-positioned to facilitate the transaction. This includes:
Standard Chartered Bank has proven to be the banking partner of choice for RMB cross-border trade settlement, we are working closely with both corporations and banks across the pilot regions. RMB cross-border trade is poised for huge expansion and creates significant business opportunities. The bank will remain at the forefront, stay close to regulatory changes, and continue to drive momentum.
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