Published: September 29, 2014
Ever since the beginning of RMB internationalisation more than five years ago, many MNCs have begun to conduct international trade in CNY for several reasons, namely, cost savings, improvements in efficiencies and to enhance risk management.
Many of these MNCs have been very successful in penetrating the China market as a result of this. Due to local regulatory constraints, a surplus in cash and profit cannot be repatriated efficiently which have resulted in what we know as the ‘cash trapped’ issue.
However, as a result of recent regulatory developments, repatriating cash and including onshore RMB within a regional or global liquidity structure is now achievable, with proven success.
China is set to overtake the United States as the world’s largest economy by purchasing power parity (PPP) far more quickly than previous estimates had suggested, and it could happen as early as this year. Whether this particular milestone materialises this year or in the foreseeable future, the result is that few multinational corporations can now ignore the opportunities that China offers, particularly given the persistence of economic stagnation or slow growth that many other world economies are experiencing.
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However, doing business in China today is a very different proposition compared with just a few years ago. Not only is the scale of opportunity growing, but RMB liberalisation is already transforming the way that multinational corporations do business, a trend that is developing strongly as companies of all sizes recognise the benefits (figure 1). Consequently, exploring and exploiting emerging opportunities for cross-border trade, liquidity and investment has become a clear priority for multinational corporations and their banks.[[[PAGE]]]
While USD remains the most common currency for cross-border trade into and out of China, this is changing rapidly. RMB is now the second most-used currency for trade finance globally. With a large number of regional treasury centres based in Asia, a considerable volume of RMB transactions are intercompany flows, but trade settled in RMB between third-party entities is also growing. According to SWIFT’s RMB Tracker (August 2014) transactions between Europe and China now represent 10% of RMB payments globally by value. The UK leads Europe, followed by France, Germany and Luxembourg. Over the past year, European payments directly exchanged with China and Hong Kong in RMB have increased by 105%, showing a considerable upward trend in RMB usage.
The launch of the China (Shanghai) Pilot Free Trade Zone (SFTZ) in 2013 was intended to be a way of introducing pilot regulatory developments before being rolled out more widely, and a growing number of corporations taking an interest in the opportunities offered by RMB. The launch of the SFTZ has been received enthusiastically by Chinese and foreign multinationals alike. By May 2014, over 6,000 entities were registered and around 30 banks had established offices. Indeed, finding office space is now a problem, testifying to its success! One of the most important developments that was introduced in the SFTZ so far is the ability to conduct two-way cross-border cash pooling in RMB and foreign currencies. Although there are pilot cases outside SFTZ, application process for SFTZ companies is significantly simplified. While RMB two-way cross-border cash pooling is currently restricted to entities located in SFTZ but it is reasonable to expect that it will be expanded more widely in the future.
Historically, repatriating RMB has been a challenge for companies, often hindering their strategic plans in China as they could not derive benefit from RMB held onshore. This latest development is a significant milestone in multinational corporations’ ability to include onshore RMB within a regional or global liquidity management structure. This avoids the issue of ‘trapped’ cash, enabling companies to organise their business activities in China around strategic rather than liquidity considerations.
Corporations are already enthusiastic about the ability to manage RMB liquidity more effectively. Although it takes time for large multinationals in particular to make changes to their liquidity structures, the first projects are now underway with considerable success. For example, we recently completed a liquidity project with a MNC in which onshore RMB is now part of a regional cash pool, completely eliminating the issue of trapped cash. The project was specifically identified by the People’s Bank of China (PBoC) as an illustration of industry case study, a major achievement for both Deutsche Bank and our customer in such a competitive market.
The growth in RMB adoption is not only being driven by trade between China and corporations headquartered in the northern hemisphere. Although the total volume is still low, RMB is likely to become significant for south-south trade, and not only in situations where one party is based in China or Hong Kong. Increasingly, as corporations hold higher levels of RMB offshore (which is not subject to onshore currency regulations) we are likely to see RMB becoming the currency of choice for transactions whether neither counterparty’s base currency is USD.
Adopting a new currency takes time and may require changes to accounting and treasury policies, processes, systems and banking arrangements. However, as the scale of multinational corporations’ business in China increases, and RMB liberalisation progresses further, the business landscape will continue to change radically. Banks such as Deutsche Bank are adding new expert resources to the team so as to meet this growing demand. In particular, we recognise the importance of understanding clients’ needs, aspirations and constraints whilst also maintaining a close relationship with regulators. This allows us to define appropriate solutions to clients’ cash, liquidity and risk management challenges, and leverage our trusted relationship with the regulators to represent the needs of our multinational clients.
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