Published: May 01, 2012
While the euro crisis continues unabated, a new currency is quietly emerging. The RMB is continuing its gradual but steady progress from a domestic to an international currency, and treasurers of companies of all sizes in all locations and representing every industry should now seriously consider the implications.
One of the first initiatives in RMB internationalisation was the launch of the RMB cross-border trade settlement scheme in 2008. This scheme has been extended gradually both in terms of the number of eligible Chinese companies, and the range of countries in which their trading partners are located. Since August 2011, the final restrictions on exporters were lifted, so any Chinese exporter or importer is now eligible to transact cross-border business in RMB, with foreign entities globally. A number of international banks have now received Settlement and Agent Bank licences, and are actively conducting cross-border trade and account opening in RMB. By the end of 2011, cross-border trade settled in RMB reached 2.58tr RMB ($408 bn).
In this month’s Treasurer’s Voice, in association with Treasury Strategies, Inc., we are delighted to be joined by John Laurens, Head of Global Payments and Cash Management, HSBC. We explore the degree of familiarity that treasurers have with the opportunities for RMB cross-border settlement. We also consider the extent to which they are using RMB for cross-border trade, and some of the drivers and constraints.
Click above box to enlarge
Currently, only a minority of companies use RMB for cross-border trade settlement. John Laurens, HSBC summarises,
“Although there are companies of varying sizes represented in the poll, it is notable that as many as two-thirds of respondents are not using RMB for trade settlement.”
[[[PAGE]]]
Not only was it a surprise that such a large proportion were not doing so, but also that this proportion was similar across companies of all sizes. For example, although nearly 62% of respondents represented companies with a turnover of more than $1bn each year, only 35% of those surveyed currently use RMB for cross-border trade (figure 1).
While the largest single proportion of respondents indicated that they were not currently using RMB for cross-border trade, but had plans to do so in the future (36%), a huge 29% of respondents had no intention of doing so. John Laurens, HSBC stresses,
“China represents 11.5% of global trade (WTO, 2010), however the RMB represents just 0.3% of payments globally. This is undoubtedly out of kilter and provides a clear indication of the extent of the increased use of the RMB that we will see in the not too distant future.”
He continues,
“It is still early days in the development of RMB as a global trade currency, but it is a definite and inevitable trend, so every company trading internationally needs to consider its plans for using RMB and what that means from a global treasury perspective.”
Click above image to enlarge
[[[PAGE]]]
The survey went on to explore the reasons why such a large proportion of companies had not started to use RMB for transactions with Chinese suppliers or buyers (figure 2). These were interesting and it is worth addressing them systematically:
i) Twenty-three per cent of respondents said that they do not have trade flows with China. While a higher proportion of small and medium-sized enterprises that responded in this way, 13.9% of companies with a turnover of $1bn indicated that they do not do business in China, including companies from Europe, the Americas and indeed Asia. It seems very hard to believe that such a high proportion of companies reflected in the survey neither source nor sell in China, so it seems most likely that those who responded in this way did not have specific responsibility or visibility over this activity, and similarly, they may not be aware of whether or not the company is using RMB for trade settlement.
ii) An equal proportion of respondents (27.3%) indicated that a) there was no demand from customers or suppliers to settle in RMB and b) they were not aware of the opportunity to do so. Those that responded that there was no demand for RMB settlement perhaps ought to consider this further: except for industries that are denominated in one currency, such as commodities and energy, most companies would prefer to operate in their home currency to eliminate FX risk. There may be commercial opportunities, therefore, to negotiate pricing by suggesting RMB settlement. For example, a company importing from China may prefer to use USD; however, if the exporter offers a discount to trade in RMB, particularly on top of an early payment discount, the advantage could be significant, with companies reporting savings of up to 7%.
In most cases, the currency of settlement would be determined by procurement, as opposed to treasury, so treasurers should be engaging with procurement to determine what commercial opportunities could exist and how they could facilitate the process.
iii) The 27.3% that expressed that they were not aware of the opportunities for RMB trade settlement illustrate the on-going need for education about RMB. Many banks, SWIFT and media companies are active in promoting RMB and the opportunities that exist, and treasurers and procurement managers should invest the time to understand RMB opportunities fully, particularly as China is increasingly such an important element of companies’ strategic growth plans. John Laurens, HSBC emphasises,
“It is surprising, perhaps disappointing, that 27.3% of respondents still lack awareness of RMB trade settlement opportunities, bearing in mind that we have seen RMB development as a key topic amongst our corporate customers. Banks such as HSBC therefore continue to have a major role to play in raising awareness and providing education in this area, backed up by advisory services to help customers with their specific needs. In addition, SAFE [the Chinese State Administration of Foreign Exchange] is working proactively with us to promote the internationalisation of the RMB, so there are many sources from which to find out more and exploit opportunities as the role of the RMB in global economy rapidly evolves.”
The issue appears to be not simply one of lack of knowledge, but also fear that RMB is somehow more complex than any other currency, not only onshore, but equally the offshore (CNH) market. John Laurens, HSBC illustrates,
“There remains some undue mystique surrounding the CNH or offshore RMB market, but outside of China it is as free and liberally traded as other non-restricted currencies. Even the repatriation of RMB into China is beginning to open up as China takes its initial steps in opening up its capital account in support of the government’s policy to encourage economic growth.”
iv) Over 15% of respondents suggested that the administrative burden was too great for RMB trade settlement. The administrative burden has declined significantly since the early days of the RMB cross-border trade settlement scheme in 2008. In fact, there is a favourable tax treatment on RMB-settled flows, and non-residents can open RMB accounts in China for cross-border trade, with approval from the provincial governing authority. However, as John Laurens, HSBC, outlines, there are some practical considerations,
“Redenominating commercial and intercompany settlements in RMB requires practical considerations, some quite basic, yet critical, such as whether the existing configuration of a company’s ERP or accounting system provides for both CNY and CNH accounting treatment.”
v) A remarkable 19.5% said that their banks lacked capability or support for RMB trade settlement. This came as some surprise, seeing as even my own tiny business has received plenty of very helpful information about RMB from the bank. We researched this further, and while we expected to find that these respondents represented small companies, perhaps with a predominantly domestic business, every company that responded in this way represented a company with a turnover of over $1bn, most of which worked with global banks. This level of response can only mean that a) these companies are not working with a bank with the right degree of capability in Asia that they require and/ or b) the respondents did not have specific responsibilities in this area, and therefore had not been engaged in this dialogue.[[[PAGE]]]
Despite the perceived challenges amongst many respondents, 35% are using RMB for cross-border trade settlement. The survey therefore explored the factors that had motivated them to do so (figure 3). Commercial drivers were the most significant considerations, including demand from Chinese counterparties (60.2%) and related to this, the ability to negotiate more competitive pricing (44.9%).
One important factor not reflected in this survey is the important role that RMB trade settlement has in capital accounting. For example, the large majority of early RMB cross-border traffic was intercompany flows, and this remains a major element of RMB cross-border trade, for example, in order to concentrate FX exposures offshore to allow more effective hedging, or to finance Chinese-based entities in RMB. John Laurens, HSBC notes,
“In addition to commercial settlement opportunities, RMB settlement also offers capital account opportunities in terms of how the balance sheet is structured. For example, companies manufacturing in China should be considering whether capital injections should be denominated in RMB.”
[[[PAGE]]]
The survey continued by moving beyond cross-border trade to find out whether respondents were using liquidity management techniques in China (figure 4). Only 25% of companies are doing so currently, although a further 35% are planning to. As John Laurens, HSBC explains, there is potentially lost opportunity here,
“Liquidity management techniques in China that were at the frontier of cash and treasury management only a few years ago are now commonplace, but this survey illustrates that not all companies yet recognise this, which spells opportunity for those respondents.”
Techniques such as cash pooling, netting and multilateral intercompany financing are now well-established, and with the regulatory environment evolving rapidly, treasurers need to keep up to date with potential opportunities, both for RMB and foreign currency balances. For example, multilateral foreign currency entrustment loan cash pooling structures enable companies to manage their foreign currency balances centrally, whilst lending to business units through multilateral entrustment loans and overnight overdraft facilities within a single legal agreement.
The majority of respondents (56.3%) noted that they manage RMB cross-border trade flows from their corporate headquarters based outside of China, but notably, 24.3% manage this activity from an Asian shared service centre (SSC) and a similar proportion within China. This is likely to be a growing trend in the future, as John Laurens, HSBC explains,
“We are seeing an expansion not only in the number of SSCs in Asia that include RMB activities, but also the number of SSCs located in China. Considerations such as operating costs and the availability of skilled personnel are leading to SSCs increasingly being located outside the coastal cities in central regions of the country.”
An increasing number of SSCs with RMB flows are operating as re-invoicing centres and in-house banks. This opens up a range of opportunities. For example, a company both buying and selling in RMB may choose to leverage liquidity management techniques such as multilateral, multi-currency notional pooling to borrow RMB or a foreign currency against an offshore RMB or foreign currency deposit as appropriate. There are multiple benefits to doing so. Balance sheet costs and ‘trapped’ cash are minimised. The company can leverage offshore financing rates on temporary overdrafts, that are typically lower than the onshore rate. FX exposure is reduced by offsetting payables and receivables, processes are more efficient, and working capital requirements are minimised.
Looking forward, few companies can afford to ignore the growth of RMB not only as a trading currency, but also increasingly as an investment and reserve currency as John Laurens emphasises,
“The growth of RMB is not simply an issue that affects large corporations: every company, including small and medium-sized enterprises, that sells, manufactures or procures goods or services internationally should have an RMB strategy, as China will be likely to feature in their business plans if not doing so already.”
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
