At present just over 10% of China’s trade is conducted in the renminbi (RMB), but this percentage is expected to at least triple in the next two years. Corporate treasurers should be taking full advantage of the benefits of China’s currency liberalisation programme and actively taking part in shaping its future direction. But what, exactly, are the benefits of trading with RMB?
Diane S. Reyes
Global Head of Payments and Cash Management
Diane S. Reyes was appointed in September 2011 as HSBC’s Global Head of Payments and Cash Management, a multi-billion dollar business operating across five regions and over 60 countries and territories. She is responsible for over 80 products and services offered to Corporates, Financial Institutions and Governmental Organisations. Reyes has over 20 years of financial services experience across a number of financial institutions with an emphasis on Sales, Client Service, P&L, Product and Risk Management in Transaction Banking. In her current role, Reyes is focused on improving the client experience around cash management and payments both locally and across borders and currencies.
For companies doing business with China, or competing for a share of its growth, the renminbi (RMB) should be seriously considered as an integral part of a cash management strategy that not only seeks an effective way to settle trade, but also facilitates investments and deepens relationships.
“If that sounds like a bold claim, consider how far China has opened itself to the world in a short span of time,” says Diane Reyes, HSBC Head of Global Payments and Cash Management. It is true that global trade with China has grown rapidly over recent decades, pulled forward by the twin locomotives of extraordinary Chinese domestic growth and increasingly transnational industrial assembly lines. HSBC research indicates that Chinese gross domestic product (GDP) is set to increase by 8.6% in 2013, and next year China will add more to global economic growth than ever before.
Meanwhile, China has been loosening controls on the RMB to help establish it as a global trade currency and, eventually, a global reserve currency. The RMB is still a newcomer amongst global currencies. By the end of 2012, just four years after China first began trade settlement in renminbi, it accounted for some 12% of China’s external trade settlement. HSBC expects that to rise to 30% by 2015, which would make it the world’s third largest trade currency. The view from HSBC’s chief economist in China is that RMB will be fully convertible by 2017.
The bank is fully engaged with this prospect and commissioned a survey, conducted by Neilson during May and June 2013, to look at the usage of RMB by more than 700 international businesses across China, Hong Kong, Australia, Singapore, the UK, the US and Germany.
The survey shows that 50% of all international companies in Hong Kong and 30% in mainland China are using RMB to conduct cross-border business, exploiting a natural trade flow. But just 11% of businesses surveyed in Singapore, 11% in the UK, 9% in Germany, 9% in the US and 7% in Australia currently use RMB in their trade activities.
Of those that do use it, most are settling transactions with intragroup trading partners but over 50% are also settling with external counterparties. Although import and export activities are prevalent amongst RMB transactions, capital injections and documentary credit/trade financing are also common in Hong Kong and mainland China respectively.
However, 61% of Chinese companies say their counterparties are unwilling to consider using RMB. The main reason, cited by 38% of respondents, is the perception that there is no clear benefit in doing so. In addition, 34% of Chinese companies say their counterparties are simply unwilling to use RMB and 31% say they are not fully considering its use, with smaller businesses even less likely to have considered using RMB at any point.
Education and awareness
Perhaps there is good reason for the apparent resistance so far to using the RMB: the survey also reveals that 52% of companies have a limited understanding of the processes behind the progressive internationalisation of the RMB. And whilst just one in ten feel that they have a solid and up-to-date understanding of RMB services, more than a quarter of users acknowledge their poor understanding of RMB services – a figure that rises to over half for non-users.
But practical difficulties may be felt by some companies. Documentation requirements and a lack of clarity on regulations are cited as the two key difficulties encountered in RMB cross-border settlement, especially in Hong Kong and Singapore. In China, barriers to adoption are more related to counterparties having difficulties obtaining, or no use for RMB.
In the next phase of development, awareness and education around the core benefits of using RMB in trade and payment settlements are vital if companies are to push ahead in this key market.
Treasury benefits of RMB liberalisation
So what are these key benefits and why should corporate treasurers and chief financial officers (CFOs) care about the internationalisation of RMB? A quick look at the positives discovered by those already using it reveals much for potential users.
For those companies already using RMB, HSBC’s study highlights a number of drivers for adoption. Foreign exchange (FX) risk mitigation is cited by 48%, followed by meeting demand from their counterparties (46%) and trading convenience (42%). Over half of the current users also feel optimistic about the growth of RMB cross-border business in 2013. What’s more, 73% are expecting a rise in the next five years – 27% predicting growth of 20% or more. It perhaps comes as no surprise that companies with a better understanding of RMB services are able to feel more optimistic about its increasing usage over the next five years.
“By settling in the Chinese supplier’s currency, businesses may now be able to avoid this additional cost.”
For those yet to use RMB for trade, there are three key factors that are piquing their interest. Most respondents (59%) cite mitigation of FX risk, 42% say better pricing and 39% point to the ability to offset market disparities between onshore and offshore RMB markets. Companies with a lower turnover are more motivated by more competitive pricing whilst reduction of FX risk/cost is seen as a strong enabler for Chinese, Hong Kong and Singaporean companies. UK companies are more likely to be motivated by cheaper pricing from suppliers.
It is evident that through a combination of RMB trade settlement procedures and FX hedging, companies may reap considerable savings from the increasing liberalisation of RMB controls. But there are further clear benefits in using RMB for trade.
“In the past, Chinese suppliers have typically needed to add a buffer of between 1-3% to their quotes to hedge against unfavourable exchange rate movement before a trade settles,” notes Reyes. “By settling in the Chinese supplier’s currency, businesses may now be able to avoid this additional cost.”
How? Within the survey, of those Chinese companies involved in international business, 41% are willing to consider discounts of up to 3% on RMB-denominated settlement, while 9% are ready to give even larger discounts. Some 53% of Chinese businesses surveyed say they would offer discounts of up to 5% for transactions settled in RMB. Of all companies prepared to offer discounts, those with a sales turnover of between $3m-$30m say they would be more willing to do so than those with a turnover greater than $30m. Likewise, current RMB users are more willing to offer price incentives than current non-users.
“Development in cash management regulations mean that investments in China can increasingly be treated as they would in any other market, allowing funds to be deployed efficiently and conveniently.”
Making trade easier
Simplification of procedures is seen to be the most effective way to encourage usage across all markets. Over half (51%) said that their RMB usage would increase if the processes involved were made easier. Whilst expansion of RMB transaction types is also important to boost the usage in mainland China and Hong Kong, further liberalisation will also stimulate greater usage in Hong Kong, Singapore, Australia and the UK. But even amongst users of RMB, simplification of procedures is key to encouraging increased usage.
Although the RMB’s life as an international currency only began in 2009, Reyes points out that its rapid development has been helped by the authorities’ progressive removal of restrictions. Other remaining RMB restrictions are also being relaxed. Between 2011 and 2012, the share of China’s inbound foreign direct investment (FDI) conducted in RMB leaped from 12% to 35% as multinational corporations (MNCs) recognised the benefits of centralising their treasury operations offshore and using China’s currency for local capital injections. Today, notes Reyes, “development in cash management regulations mean that investments in China can increasingly be treated as they would in any other market, allowing funds to be deployed efficiently and conveniently.”
“We are witnessing acceleration in China’s financial liberalisation, with positive impacts on cash management,”
As an example, major banks can enable a customer to use RMB to settle cross-border payments and collections on a gross-in, gross-out settlement basis with the parent company’s overseas treasury centre, which can then be settled directly with the counterparty through a payments factory or shared service centre (SSC).
Before this, each transaction had to be settled on an individual basis directly with the counterparty; increasing transaction costs, currency risk and fragmenting payment processes for treasuries. For Reyes, this new approach allows for improved management of FX exposures and optimises liquidity management for the company and, she adds, “it sets a precedent for other corporations that will ultimately help boost circulation of RMB outside mainland China”.
The benefits to both Chinese and foreign corporations in China are clear: payment processes can be conducted more promptly and efficiently, and can be centralised into a payments hub or SSC more easily. Further, payment timing can be predicted more easily, enhancing working capital and cash flow forecasting.
“We are witnessing acceleration in China’s financial liberalisation, with positive impacts on cash management,” Reyes comments. Indeed, treasury management solutions involving RMB are evolving quickly, albeit on a pilot programme basis (led by the central bank, the People’s Bank of China (PBoC), and the State Administration of Foreign Exchange (SAFE)). A catalyst for this has been the need to include excess RMB balances in China with a company’s offshore RMB pools, in locations such as Hong Kong, Singapore and London, to optimise internal regional and global treasury management structures. “Hence, we anticipate new pilot projects for RMB cross-border sweeping in the near future, as part of China’s continued development objectives for RMB to become an international currency.”
“By adopting RMB today, companies can build strong relationships with a wider network of Chinese partners,”
With its natural trade flow with China, Hong Kong has played a leading role in the global expansion of RMB and remains the largest, best developed offshore market. But China is in the process of widening the network of clearing centres outside the mainland.
As the pool of RMB liquidity grows in locations outside China, the need for offshore clearing mechanisms to facilitate RMB transactions increases. For example, Singapore has recently become another RMB clearing centre for Asia, in addition to Hong Kong, and London for Europe.
“These international clearing infrastructures could be linked when the new RMB international payment system in China, the China International Payment Scheme (CIPS) is rolled out in 2014,” notes Reyes. CIPS will be based on SWIFT standards, including International Organisation for Standardisation (ISO) 20022 formats and ISO currency codes; the aim, she explains, is to facilitate straight through processing (STP) and “greater international cohesion”.
New suppliers, new consumers
Despite the reticence of some respondents mentioned above, and the clear need for an educational and awareness programme, 24% of those surveyed signalled their expectation to be using the currency within the next five years. Interestingly, companies who stated regulation and process as a barrier to using RMB also appeared to have a higher predisposition to using RMB in the near future, a sign perhaps that these difficulties are not insurmountable, especially given the initiatives launched by the authorities.
In fact, over the next three years there is a high degree of stated intention to use RMB in Hong Kong (36%), mainland China (33%) and Singapore (20%). For all non-users of RMB, again it perhaps comes as little surprise that the intention to use it in the next three years is significantly higher amongst those with a better understanding of the benefits.
“By adopting RMB today, companies can build strong relationships with a wider network of Chinese partners,” says Reyes. “Because the RMB is convenient for Chinese counterparties, importers who use it potentially open themselves up to a new layer of Chinese suppliers who may prefer the ease of using their own currency, or who may be reluctant to take on dollar exposure because their cost base is denominated in RMB.”
What’s more, it may pay a “relationship dividend” for those looking to sell into China. “Being an early adopter of RMB in your treasury can help secure market share as competitors jostle for position in one of the world’s fastest-growing consumer markets.” It is worth noting that HSBC’s research suggests that between now and 2050 the average Chinese worker’s income is projected to increase seven-fold, from around $2,500 to about $18,000, giving some sense of the potential for growth this market holds.
Corporate treasurers can contribute to liberalisation
Financial liberalisation is set to continue, realising the Chinese government’s ambitions for RMB to be a leading currency offshore and for cities such as Shanghai and Beijing to become major international financial centres by 2020.
However, regulators are not pursuing this strategy in isolation. Reyes points out that the collaborative nature of the pilot schemes, including the regulators, banks and corporate customers, means that treasurers have an important role to play in shaping financial liberalisation and prioritising new developments. “It is important that treasurers remain up-to-date, not only with new opportunities to enhance their cash and liquidity management position in China, but also in understanding which pilot projects might be relevant to their business,” she advises. “By becoming involved in pilot projects, companies can help to shape new developments and gain early advantage.”
“Being an early adopter of RMB in your treasury can help secure market share as competitors jostle for position in one of the world’s fastest-growing consumer markets.”
In short, the evolution of RMB now represents an opportunity for companies to cut costs and improve financial flows. Ultimately, it may also be a way to start new business relationships and to tap a vast pool of aspiring customers. As Reyes comments, “that is no small achievement for a currency still new on the international stage”.
HSBC is one of the world’s largest banking and financial services organisations. The Group’s network is comprised of 6,600 offices in 80 countries and territories in Europe, Asia Pacific, the Middle East and Africa. HSBC combines extensive global reach, notable financial strength, and a long-term commitment to our Commercial Banking and Global Banking and Markets clients. We offer a wide array of global Payments and Cash Management solutions, from traditional to innovative e-enabled solutions, designed to address the needs of our clients today, as well as in the future.