With constraints on cross border payment processing and ongoing regulatory changes in China, multinational corporations (MNCs) are applying payment and treasury center best practices to enhance payment processing efficiency, and manage foreign exchange (FX) risks more effectively for Renminbi (RMB) cross-border transactions.
The Evolution of Cross-Border Payment Processing
Payments in Renminbi (RMB) for cross border trade settlement first started in 2009, after the People's Bank of China (PBOC) opened up the currency for international trade, and usage expanded in 2010 when the PBOC allowed investments using RMB. Trade settlement using RMB, whilst growing quickly, has been hampered by burdensome requirements, however, as regulations required verification of the authenticity of the underlying trade and reviews of a multitude of documents, including customs declaration forms, invoices and sales contracts.
The PBOC issued the latest guidelines on simplified requirements for RMB Cross Border trade settlement on 10 July 2013, allowing banks to process RMB Cross Border payments with simpler trade documentation requirements. Whilst these guidelines did not completely remove all the documentation required, it did provide for a consistent stance across the nation. Corporates that are not on PBOC's List of Enterprises Under Close Supervision may be able to further enhance their RMB payment efficiency with documentation requirements being reduced.
Whilst the PBOC continues to introduce measures to further promote the acceptance of RMB in the international marketplace as the currency of choice for trade settlement, regulatory compliance can present some challenges. In China, responsibility for regulations and internationalization is diffused among the PBOC, the State Administration of Foreign Exchange (SAFE), the Ministry of Commerce, the Ministry of Finance, Customs and the State Administration of Taxes (SAT) agencies. Along with understanding the regulations, corporates need to recognize the different priorities among various agencies so that they can follow regulations appropriately, and be able to take advantage of the ongoing liberalization of capital account activities, exchange rates and interest rates.
Enhancing Payments Efficiency
Despite operating in a complex environment, more corporates are moving towards using the RMB for payments, and they are looking at how to apply best practices so that they can make processing more efficient immediately, and be well positioned for changes in the future.
One practice corporates are using, particularly when they have RMB payables and receivables, is to set up a specialized team in Regional Treasury Centers (RTCs) to manage centralized payment processing, or to develop complex structures such as a Payments Factory to facilitate the central management of RMB onshore and offshore. Although Hong Kong and Singapore are still preferred locations for RTCs, more corporates are setting up RTCs in China to take advantage of the RMB collected through their organic growth in the China onshore market despite the hurdles of capital account controls and higher tax rates.
In the offshore market, corporates are also working towards including RMB in their centralization of payments, so that a payment center offshore or treasury center overseas can make consolidated payments on behalf of other affiliated entities when paying into China. It will still take time for corporates to fully achieve greater efficiency, however, because there are regulatory requirements to monitor and report cross border trade settlement transactions with each of the overseas trading entities and not just with one overseas RTC.
Along with working to increase payment processing efficiency, corporates are increasingly focusing on risk mitigation, and three risks are particularly important.
Firstly, corporates are focusing on resolving the regulatory risk caused by the multi-layered responsibility for international payments transactions among PBOC, SAFE and the other agencies, and on determining whether solutions that they would like to implement are actually feasible. Corporates are either enhancing their internal capabilities or working closely with their banking partner to understand and address these regulatory risks.
Secondly, operational risk in foreign exchange management and processing remains a concern; particularly since the majority of corporates often settle in other currencies, lacking experience and understanding of the various controls and limitations related to RMB. Corporates are working to define strategies to manage offshore RMB, often in partnership with their global bank, so that they can ensure that their treasury teams as well as overseas customers and suppliers, are managing foreign exchange effectively and are prepared for any changes downstream.
Finally, corporates are setting up structures for hedging FX risk, as the continuing trend of RMB appreciation may result in additional FX costs, particularly when importers or exporters have costs and expenses domestically in RMB, whilst their contracts with overseas purchasers or sellers are in US dollars or other currencies. Whilst some corporates have been able to mitigate FX risk by switching their payment currency to RMB, so that payables and receivables are in the same currency thus achieving some natural hedging, tools to manage FX risk in China remain limited and corporates are working with their banking partners to develop additional risk hedging tools that can enable them to manage their FX exposure more effectively.
Leveraging Global Banks
Given the complexity of the payment environment in China, an increasing number of corporates are leveraging their global banking partners more so that they can navigate the environment effectively and take advantage of the bank's thought leadership. Corporates can work with their global bank to obtain the latest trends and developments in RMB payment processing in China, enhance their internal processes to support RMB payments, and focus on the specific issues that are most important to their treasury functions. Global banks can also support corporates in making sure that the complex details for processes such as centralized payments meet regulatory requirements, helping corporates understand the banking system, and leveraging their relationships and global platforms to help manage payments inside and outside China.
One additional opportunity for corporates comes from leveraging a global bank's contacts to present their views to government agencies that may not be fully aware of the constraints of some of the required processes, or to conduct workshops that enable corporates to explain their unique situations and business needs in a neutral forum.
In an environment of constant change and diffused responsibilities, drawing on the experience and expertise of a banking partner can benefit corporates doing business with China tremendously.
Executive Director and Head of Multinational Corporate Sales
Vice President and Product Manager
Global RMB Clearing