Treasury Today Country Profiles in association with Citi

China to free up RMB to boost usage

Bumble bee on echinops flower

The Chinese central bank gives corporates more freedom when using the RMB in an effort to boost the internationalisation of the currency.

On Friday (5th January), the People’s Bank of China (PBOC) communicated a host of changes that it is making in order to “improve policies on yuan cross-border businesses, create a sound business environment, serve the ‘Belt and Road’ initiative and create opening up on all fronts”.

The headline for foreign corporates operating in China is that renminbi profits and dividends can now be repatriated without restriction. This will come as a boon to corporates in China who have bemoaned having high-levels of trapped cash in the country that could be applied elsewhere across their business.

Of course, China is not completely releasing its grip. The PBOC has stated that repatriation will only happen “after the bank has audited related documents according to the rules”. However, the initial reaction is that this should make life a lot easier for those corporates looking to shift profits back home.

The new rules also aim to allow foreign enterprises to invest in China more easily. The PBOC has stated that it is “optimising relevant account opening and payments”. This includes allowing corporates to open multiple renminbi deposit accounts in different locations across the country and transfer money to these accounts.

Elsewhere, the PBOC is also giving more optionality to domestic businesses looking to fund their operation by allowing the proceeds of dim-sum bonds or shares to be brought into China based on their actual needs.

Normalising the playing field

The latest announcement from the Chinese central bank is part of a wider set of initiatives to come that aim to optimise the business environment in China.

In a note on its website last week, China’s State Council said that: “Greater efforts should be made in streamlining administration, compliance oversight and offering better services. An internationally competitive business environment would have equal treatment for domestic and foreign enterprises and stimulate market entities and social creativity.”

Facilitating the belt and road

China’s ambitious Belt and Road initiative, a multi-billion-dollar investment and development project designed to boost trade and stimulate economic growth across Asia and the world, is also behind the latest tranche of rules.

Indeed, the PBOC has said that it will liberalise the cross-border RMB business of individuals. The circular notes that to “serve the Belt and Road initiative” banks can “provide individuals with cross-border payment services under other current account items”. This will allow overseas workers to remit genuine overseas income more easily back into China. Foreign workers will also be able to send domestic RMB overseas.

The PBOC’s set of new rules are also designed to encourage the greater use of RMB in cross-border trade along the Belt and Road by enterprises. To achieve this, the PBOC has stated that all “cross-border business allowed by the law to be settled with foreign exchange can also be settled with RMB by enterprises”.

2018: the year of RMB?

Whether these initiatives will have the desired effect and boost the internationalisation of the RMB in 2018 remains to be seen. Indeed, it has been a tough few years for the internationalisation project, which after much fanfare has stalled after a tumultuous few years for China and the currency. This has seen the RMB linger in fifth or sixth place when it comes to the world’s most active currencies.

However, with China beginning to take steps to liberalise the RMB once again and putting its weight behind projects such as bond and stock connect to build bridges between China and the international financial system, the signs are positive for the currency. Yet, despite these efforts, RMB internationalisation will likely continue to develop slowly, with further speed bumps to come down the road for sure.

Pakistan: RMB over the dollar

The growth of the RMB as an international currency will certainly increase if China can strike more deals like it has with Pakistan – a key Belt and Road country. Indeed, since 2013 when the two countries launched the China-Pakistan Economic Corridor (CPEC) the two countries have become increasingly entwined.

The latest step is that Pakistan has said that it will allow the RMB to be used for imports, exports and financing transactions for bilateral trade and investment activities.

“As per current foreign exchange regulations, Chinese Yuan (CNY) is an approved foreign currency for denominating foreign currency transactions in Pakistan,” the central State Bank of Pakistan said in a statement. “In terms of regulations in Pakistan, CNY is at par with other international currencies such as USD, Euro and JPY.”

Analysts have commented that the move is positive and will facilitate increased Chinese investment in Pakistan.