Market expectations are that up to 35% of trade with China could be settled in RMB by 2015. Is NOW the time for companies to start invoicing in renminbi (RMB)? This article flags key considerations for treasurers weighing the operational and risk management merits of building RMB into their regional and global processes.
Drivers of Change
Increasing ease of conducting business with China and the development of new products in the offshore CNH markets are driving usage of the RMB as a trade settlement currency.
China policy makers have in the last couple of years, continually simplified policies and processes to ease the way for global corporations conducting business with China. Among these initiatives:
- Significant reduction in requirements for trade documents including the bill of lading to support RMB receipts and payments. A few key benefits for overseas corporations have resulted. Firstly, administration of a labor intensive process has eased, allowing redeployment of resources to more value-added tasks. Straight-through processing with RMB payments is now within reach for international corporations. Secondly, treasurers can now have more accurate cash flow forecasts with the closing of the gap between when funds are assessed and when they are released by Chinese corporations. Previous challenges where payment for a 180-day invoice could only be received on the 190th day for one payment; and on the 195th day for the next, made it difficult for treasurers to manage cash flows. With changes however, forecasts can be more accurate and improved cash management practices applied.
- Procedural simplification supporting Pay and Receive on Behalf (POBO/ROBO) structures. Payment/receive-on-behalf model within a group of companies can be supported under the RMB Cross Border Settlement pilot scheme in Shanghai. This is subject to upfront review of the model by the bank, supported by appropriate due diligence at the transaction level. Banks registered in Shanghai may offer this service and are subject to approval from PBOC Shanghai.
- Intercompany lending. In late 2012, the People's Bank of China (PBOC) Shanghai head office began permitting corporations (on a case-by-case basis) to perform intercompany lending between their China and overseas entities. This allows for overseas entities to more effectively deploy cash built up from successful operations in China to other entities within the group and aid working capital management.
Development of the CNH market is also driving usage of the RMB. Corporations can now manage their foreign exchange exposures via the deliverable forwards market, instead of relying on traditional non deliverable forwards. This allows for treasurers to manage their underlying positions in RMB vs. USD. As observed in the recent Bourse Consult paper for the City of London's RMB initiative – "Trading in nondeliverable forex products is currently running at significant levels but this business is expected to shift to deliverable products as currency controls are eased. This will considerably boost volumes in spot and other deliverable products. There are signs that this trend may be under way."
Opportunities for Growth
As momentum in the internationalization of the RMB picks up, the impetus will strengthen for corporations to use RMB for settlement and capture the opportunities offered by the internationalization program.
Both international and China corporations seem poised to gain:
International corporations. Beyond the obvious plus of access to more buyers and suppliers in China, the switch to RMB can present companies the opportunity to review and concentrate foreign exchange management with established hubs and potentially benefit from economies of scale. In addition, there may be opportunities to review contracts and renegotiate pricing and payment terms.
China corporations. For China corporations, dealing in RMB takes away the burden of managing foreign exchange risks and presents an opportunity to price more competitively and access more buyers in overseas markets.
Ready for RMB Settlements
With RMB internationalization maintaining its momentum and the opportunities for companies inherent to the scheme, building RMB into their regional and global processes seems inevitable for treasurers.
As a treasurer, preparedness is key. Reactive application of risk management practices just as vendors or customers are settling their trades in RMB, may be a step too late. In short, now IS the time to review preparedness for invoicing in RMB.
Some key considerations for companies in evaluating their position and preparedness:
- Value and frequency of flows with China. Significant trade flows with China will determine if an RMB account is required or if settlement can be managed reactively.
- RMB account location. One consideration would be a treasurer's strategic intent with regard to centralization of currency accounts – in which case, a fungible location like Singapore, Hong Kong or London may fit the bill. Another is proximity -- is the treasurer's priority setting-up within easy access of regional treasury staff for optimal client service support? A third key consideration is funding -- how does the treasurer plan to fund RMB payments? Would the location make economic sense in securing funding to support trade transactions?
Unless corporations are reviewing investments into local RMB products, the establishment of multiple clearing systems should not affect the decision for account locations.
- Foreign exchange strategy. Currently, different forward points apply for CNH vs. CNY contracts, and hedging in China is subject to regulatory and documentation requirements. The RMB internationalization scheme is offering up options and flexibility for corporates to incorporate RMB in your existing foreign exchange policies and procedures.
- Trade financing needs. RMB Letters of Credit can now be issued in the name of the overseas, company which can effectively improve return on equity.
- Promoting the company's ability to receive/pay in RMB. Communication to trading partners and internal procurement/sales functions to ensure that the right dialogues take place and flows can be managed appropriately from program initiation is a critical, but often missed best practice.
In short, it pays for treasurers to be prepared and start leveraging opportunities for process and pricing improvements from settlement in RMB.