Treasury Today Country Profiles in association with Citi

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The birth of a new currency

Silk moth

The internationalisation of the yuan brings with it the need to understand a new and complex currency market. This introduction is the first in a series of four articles - in association with Citi - that will describe renminbi products and services in detail for treasurers looking to do business with China.

Cutting through the jargon

Newcomers to the Chinese markets may initially be confused by the multiplicity of terms for what they think of as one currency. Yuan is to renminbi what pound is to sterling; the first is the unit of account the second the name of the currency. The currency code RMB is used generically for the yuan irrespective of jurisdiction or market. CNY refers to the mainland China yuan traded onshore. CNH is used for the offshore deliverable market traded primarily in Hong Kong. CNY NDFs are the dollar settled non-deliverable forward market. And CNT refers to a trade settlement exchange rate to which offshore corporates have access.

Recent history of de-regulation

It was in 1993 that the People’s Bank of China (PBoC) signed agreements with the central banks of eight neighbouring countries for the use of its currency in bilateral trade settlement. In 2003 individuals in Hong Kong and Macau were allowed to freely exchange and remit RMB (with daily limits). In mid-2005, the RMB was de-pegged from the USD. In 2007 the offshore RMB bond market was authorised. In 2008 the PBoC and Hong Kong Monetary Authority (HKMA), signed an agreement to set up a currency swap line. And in July 2009, a pilot programme for cross-border RMB trade settlement was launched in Shanghai and four cities of Guangdong province for cross-border trade with Hong Kong, Macau and ASEAN. Swap agreements between China and various trading partners were signed to underpin this programme.

However, the pace of internationalisation has dramatically picked up in the last 12 months with several key developments:

  • June 2010:

    expansion of the pilot programme to 365 corporates in 18 additional mainland provinces for cross-border trade with all countries.

  • June 2010:

    de-pegging of the currency from the US dollar (after unofficial reinstatement of the peg during the financial crisis).

  • July 2010:

    amended clearing agreement between The People’s Bank of China (PBoC) and Bank of China HK (BoC HK) making CNH transferable between entities outside the mainland.

  • August 2010:

    pilot programme for opening the bond market.

  • December 2010:

    the number of mainland exporters allowed to participate in cross-border CNY settlement was raised to 67,359 from 365.

  • January 2011:

    pilot programme for RMB overseas direct investment settlement.

Says Alan Lin, Head, Global Transaction Services, China, “Broadly speaking, the Chinese government has a three-legged approach to full internationalisation. The keystone of the programme is to make the RMB a global trade settlement currency; the second is to make it an international investment/debt currency; and the third, much longer-term aim, is to make it an international reserve currency.”

Market mechanics

The easiest way to understand the multiple markets and how they have developed recently is to follow the currency.

Step One: Availability

The pre-requisite for internationalisation is that RMB leaves mainland China. This was achieved by the trade settlement programme launched in July 2009.

Step Two: Offshore circulation

Then that money has to circulate offshore, which means allowing banks offshore to accept CNY deposits, which Hong Kong banks have been allowed to do since 2003 and banks elsewhere is the world from various later dates. The 2009 pilot programme for cross-border trade increased deposits from exporters and importers. This development of offshore RMB circulation also required the intervention of a quasi-central bank for RMB in Hong Kong, a role fulfilled by Bank of China Hong Kong (BoC HK).

Then that money has to circulate more freely. To begin with, RMB in HK were only available to retail customers (for RMB deposits and bonds), corporates (for trade settlement), and depository institutions (for attracting deposits). These restrictions have now been relaxed.

Step Three: Evolution of RMB product offerings in the offshore market

In July 2010 PBoC amended the Clearing Agreement with BoC HK. This allowed corporates to open RMB accounts and transfer funds across accounts for any purpose, not only if they relate to trade settlement. In addition, banks could now sell RMB-linked products, such as CDs, deliverable forwards, mutual funds, and insurance products. Interbank CNH deposits and CNH deliverable forwards started trading in the market.

Step Four: Globalisation

For the last six months, any corporate or financial institution regardless of their country of domicile has been able transact in RMB in HK. However, only designated types of transactions can access the CNY rate, where banks can get guaranteed rates from the RMB settlement agent and is subject to a quota (RMB 4 billion for 1Q) that is proving to be inadequate. These transactions are also monitored by the HKMA, Hong Kong’s central bank. Non-trade related transactions can only be squared in the CNH inter-bank market.

Next steps?

So, today there is a flourishing and relatively open offshore CNH market. Though both inflow and outflow trade transactions are allowed, the RMB outflow is much more active than the inflow. In addition to the trade flows, the next stage of the currency’s liberalisation is allowing capital account and investment transactions to flow back onto the mainland. This has only just begun via the Mini-QFII process, which will be addressed in a later article in this series, via allowing certain institutions to participate in various onshore bond markets, and the use of additional dedicated swap lines for this purpose.

The final stage in the whole process would be the opening up of the capital account. This will be the last and most cautious step of the internationalisation of RMB. On 13thJan 2011, the PBoC announced another pilot programme which allows qualified corporates to settle overseas direct investment (ODI) in RMB. This is an important milestone in the opening of the capital account, although ODI settled in RMB will still need approval on a one-off basis. The next stage may be that offshore companies use RMB for FDI too.

Cross-border trade settlement

Cross-border trade settlement in RMB is the foundation upon which the whole internalisation project is based. The pilot programme to allow direct settlement of RMB transactions for cross-border trade was formally launched in July 2009. This allowed a limited number of foreign corporations to settle their China-related sales or purchases directly in RMB, but limited the number of counterparties and also forced all transactions to be two-way flows with the mainland: currency flowed out but then back in through the trade settlement route.

That has changed. As of today 67,724 mainland exporters from all over China are allowed to participate in cross border RMB settlement with any non-Chinese corporate regardless of domicile. At the end of 2010 it is estimated that cumulative trade settlement volumes had reached around RMB 500 billion.

Diagram 1: How CNY turns into CNH and vice versa
Diagram 1: How CNY turns into CNH and vice versa

In addition, foreign corporations are now allowed to accumulate RMB offshore and can transfer it to other entities outside China as well. Now treasurers can actually do something with the currency that they are earning from China, which is why trade settlement has been the main driver of the build-up of CNH deposits in Hong Kong. How treasurers manage the currency they accumulate in this way will be addressed in Article four of this series.

BoC HK is the sole designated trade settlement clearing bank. Via its settlement quota, it provides settlement services to participating authorised institutions (AIs). BoC HK is the only settlement agent between the banks in Hong Kong and the PBoC. In addition, the HKMA has activated a RMB 200 billion swapline with China which it can use to help any AIs that need to settle RMB trade transactions immediately, regardless of availability under the BoC HK quota arrangement. Agency banks have to distinguish between institutional purchases of the RMB for non-trade purposes and trade-driven purchases when reporting to HKMA.

Key benefits for corporates

The benefits to a buyer from the China market of having a RMB account include the ability to:

  • Improve supplier relationships:

    the elimination of foreign exchange documentation means days sales outstanding (DSO) for the suppliers is shortened. Suppliers can receive faster tax rebates from the authorities, thereby reducing costs in the supply chain.

  • Widen the supplier base:

    local currency settlement can be used to access a wider supplier base who have limited access to foreign currency.

The benefits to a seller include:

  • Reducing risk:

    a long local currency cash position is a natural hedge for two-way import and export flows with China.

  • Improving turnaround time:

    shorten settlement cycle and days sales outstanding by eliminating foreign currency settlement.

  • Widen client base:

    RMB settlement can be used to access a wider client base who might have limited access to foreign currency.

Practical considerations for treasurers

For those companies considering participating in the trade settlement programme, there are a number of factors to consider. According to Sridhar Kanthadai, Regional Head, Treasury and Trade Solutions, Asia Pacific, Citi, the key consideration is, “Choose the right partner – renminbi cross-border settlement requires both the remitter and the beneficiary to be ready before settlement is conducted. A bank with a global footprint can provide accurate and efficient advice on how to do settlement and what a company should take into consideration. In addition, a pre-requisite to participate in the renminbi cross-border programme, companies need strong local support in China on local regulatory reporting.”

Other items on the treasurer’s checklist should, according to Citi, include:


  • Confirm qualifications

    make sure you are registered in a pilot area. The onshore Chinese company must be a Mainland Designated Enterprise (MDE) to settle export transactions. For capital account transactions, pre-approval from government authorities should be sought in advance.

  • Thorough preparation and analysis

    since renminbi cross-border settlement has a number of regulations to follow, thorough evaluation is required before getting started. In particular, it is critical to ensure that there is sufficient renminbi liquidity to support your renminbi business offshore.

  • Ensure renminbi agreement

    as requested by regulations and especially for Chinese domiciled customers, change all previous foreign currency agreements to renminbi agreements. Relevant documents need to be submitted to the bank for verification.

  • Don’t speculate

    participating banks and MDEs should always bear in mind that all cross-border transactions should be conducted upon real business needs. Thus, all supporting documents should be prepared and in place for compliance review and checking to ensure the transactions are in compliance with current FX regulations.

The point about ensuring that there is sufficient liquidity to support any offshore business is important. CNY can freely leave China and enter the CNH market as long as the transaction is backed by trade documents, but the reverse is not true.

So, a mainland-based importer can pay in CNH for imports. This flow of CNY out of China into CNH happens without reference to the trade-settlement quotas set by the PBoC.

However, a non-China based buyer of Chinese goods may not be able to obtain CNH to pay for these purchases as this currency has to be bought in the market or from the company’s bank, and eventually that position will need to be squared via BoC HK subject to the conversion limits set by PBoC. If these limits are exhausted, this is a problem and it is not a theoretical one.

Last year the CNY 8 billion conversion quota for 2010 was exhausted ahead of year-end. That is, there had been more demand for CNH from non-China based corporates than authorities had expected.


As Philippe Jaccard, Head of Global Liquidity and Investments, Global Transaction Services, Asia Pacific, Citi, puts it: “The RMB market looks complex but rapid de-regulation is creating opportunities for foreign corporations to expand their business with the mainland. By choosing the right partner banks onshore and offshore, companies can access a range of banking services that looks and functions like those they are used to in any other countries, with the complexity taken care of by experts in the local environment.”