All ready to start clearing Renminbi (RMB) payments? Not seeing any or low volumes? This article flags how a Financial Institution (FI) can encourage usage of RMB by understanding the benefits the RMB internationalization offers to a corporate client.
Drivers of Change
Market expects that up to 35% of trade with China will be conducted in RMB by 2015. Whilst there is an upward trend, there is a way to go to meet the market expectations.
As J.P. Morgan has observed, there are some corporates which have jumped on the RMB bandwagon, however, many are still hesitant and are adopting a wait and see approach as they are unfamiliar with the environment and the ever evolving regulatory environment.
It is therefore of great importance that we help our corporate clients understand how China policy makers have in the last couple of years, continually simplified policies and processes to ease the way for global corporates 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 corporates 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 corporates. Secondly, corporates 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 corporates. 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 corporates to manage cash flows. With changes however, forecasts can be more accurate and improved cash management practices applied.
Intercompany lending. In late 2012, the People's Bank of China (PBOC) Shanghai Head Office began permitting corporates (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. Corporates can now manage their foreign exchange exposures via the deliverable forwards market, instead of relying on traditional non-deliverable forwards. This allows for corporates to manage their underlying positions in RMB vs. USD. As observed in the December 2012 Bourse Consult paper for the City of London's RMB initiative – "Trading in non-deliverable foreign exchange 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 corporates to use RMB for settlement and capture the opportunities offered by the internationalization program.
It is important to understand that both international and China corporates are poised to gain:
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.
For China corporates, 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, will become inevitable for corporates, particularly larger conglomerates.
Prior to settling flows in RMB, these are some of our recommendations for corporates to evaluate their readiness.
Value and frequency of flows with China. Significant trade flows with China will determine if a RMB account is required or if settlement can be managed reactively.
RMB account location. One consideration would be a treasurer's strategic intent on 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 corporates 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 offers options and the 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.
In short, the drivers of RMB settlement flows are driven from largely the corporate client base, due to trade settlement with Mainland China. For a financial institution looking to increase flows and early mover advantages in their local markets, it is important to recognize how the RMB internationalization applies and benefits their targeted client segments, and allows for the development of the right RMB products to match the clients' needs.