Opportunities for RMB cross-border trade settlement have developed rapidly since the first liberalisation moves in 2009. Today, there is a growing trend towards the use of RMB for transactions. Indeed, the latest SWIFT RMB Tracker data shows the Chinese currency has moved up from its position as the 20th global payment currency to fifth in the last two years.
Multinational companies (MNCs) are taking advantage of a number of benefits – whether to reduce foreign exchange (FX) risk and administrative costs, gain from potential RMB appreciation, or to expand and strengthen relationships in their supply chain ecosystem. In fact, there is growing evidence that companies can improve their negotiating position with Chinese customers and suppliers when the Chinese currency is used for trade invoicing purposes.
While there are strong incentives for companies outside of China to transact in RMB, not all companies are prepared to jump on the bandwagon at this point. What are the considerations that treasurers need to evaluate before making the switch to RMB as an invoicing currency?
For companies buying from China and selling overseas, especially MNCs executing inter-company transactions with their Chinese entities, settling such deals in RMB reduces exposure to FX risks. It also enables centralisation of FX management at the regional, group or in-house bank level, which allows for economies of scale and improved pricing negotiation. For example, entities are able to receive proceeds settled in RMB earlier (versus foreign currency receipts in China), facilitating improved cash flow forecasting and negotiation for better pricing terms. Other benefits include potential discounting from third-party suppliers and access to a larger supplier base.
For companies sourcing from overseas and selling to buyers in China, there are benefits to be gained with a simpler documentation process by using RMB (versus foreign currency payments) enabling a more efficient collection cycle and access to a larger customer base. For MNCs with significant intercompany flows with China, there are benefits in centralising the FX risks with an overseas function such as a treasury centre or in-house-bank versus using the local Chinese entity which may not have the know-how or primary responsibility to effectively manage FX positions.
With the benefits in mind, the types of companies most incentivised to adopt RMB at present are those with manufacturing and sales in the China market. These companies are typically in the fast-moving consumer goods, healthcare or industrials sectors. Naturally, it makes sense for these companies to offset their operational expenses in the same currency that is generated from their revenue. In addition, due to the benefits from FX hedging, companies with significant intercompany flows with China have also been the first to review and make the switch to RMB.
On the other hand, invoicing in USD is still the more convenient choice for US-headquartered companies since they can eliminate FX risk by trading in their home currency. Other Western MNCs may find managing USD FX risk to be less challenging than managing RMB risk. Similarly, transaction flows from businesses, such as electronics or oil commodities, where China is part of the supply chain and not the only supplier or buyer, will continue to be denominated in USD.
Weak currencies have served to bolster RMB appeal too. Recent depreciation of the euro, for example, has notably influenced the dynamic of European companies’ adoption of RMB. Indeed, volatilities in the European currencies and other weak global currencies have prompted some companies to gradually increase their use of RMB in a bid to diversify and mitigate FX exposures.
Considerations before making the switch
Changing an invoicing currency is never easy as this involves a comprehensive review across all relevant business units and systems. A company needs to ensure there is sufficient implementation resources assigned to execute the change and the perceived benefits, as have been highlighted above, are sufficient to warrant the costs likely to incur.
The change to RMB trade invoicing needs to be a long-term strategy as it cannot be easily reversed given the rules and regulations in China and the potentially high switch-back costs. The following considerations should be evaluated:
1. Introduction of a new currency code – CNH
With the existence of two currency codes for RMB, namely onshore CNY and offshore CNH, companies will need to ensure that their treasury and dealing systems allow for trading in CNH as a new currency. In addition, any incremental risks, tenor availability and instruments available in accessing the CNH market needs to be considered in foreign exchange policies. It is the case too that the trade settlement currency for RMB remains as CNY and therefore may create currency/system conflicts which need to be reviewed.
2. Changes to trade documentation
While the RMB internationalisation initiative has simplified processing, there are still cross-border controls in place and nuances which companies must understand for effective implementation. Supporting documentation will need to be amended accordingly to ensure proper validation can be conducted by the relevant authorities in China. The list includes the intercompany trade agreement, purchase order, place of acceptance authority document and the invoice (thefapiaowhich is an official invoice registered at the local tax bureau and is used as a form of proof of purchase).
3. Understanding the nuances of RMB settlement
We have seen significant progress over the past few years, however compared to USD, RMB settlement is still very much in its infancy and there are several considerations that a corporate should be aware of in ensuring that their payment obligations continue to be fulfilled on a timely basis.