That should reduce the amount of red tape during the verification process of their trade settlement in the Chinese currency. In the case of established customers’ transactions, the know-your-customer (KYC) procedures will be simplified – specific companies that meet the stated criteria would not have to resubmit documents repeatedly for every single cross-border trade transaction, which was required previously.
“That will speed up renminbi-denominated trade invoicing between Hong Kong and China trade,” says Li-Gang Liu, Hong Kong-based head of Greater China economics at ANZ. “As position squaring in Shanghai becomes easier, clients will have greater flexibility in selecting a conversion rate, either [onshore or offshore renminbi] in their favour.
“Banks will also save unnecessary man hours dealing with the settlement process and will be able to focus on new client acquisition, especially established offshore customers that have fulfilled the specified KYC status.”
AIs are advised to verify the identity of the customer and gain a thorough understanding of their background and businesses as part of the KYC procedure. Also, AIs should only deal with customers who are able to meet their obligations, and operate their business in a lawful and ethical manner.
Towards the end of last year, the HKMA had concerns about some of the trades going through the conversion window, as some might not be in full compliance with regulations, say experts.
As a result, multinational companies (MNCs) have to provide several types of trade documentation, which includes third-party paperwork, as stipulated in a circular released by the HKMA on November 8, to satisfy due-diligence requirements. This has been dissuading these entities from transacting in the Chinese currency.
Now specific types of corporations are allowed to overcome the extra documentation hurdle as a result of the new guidelines laid out by the HKMA on Tuesday.
Eligible companies under the new regime must be listed for not less than three years in Hong Kong, China, Taiwan, London, New York, Singapore or other jurisdictions which are a member of the Financial Action Task Force (FATF).
The corporate or its subsidiary must also have a business relationship with the AI group – including the AI’s headquarters, branches or subsidiaries whether in or outside Hong Kong – for not less than three years.
“It doesn’t benefit all the companies, but at least it benefits some,” says Thomas Poon, Hong Kong-based head of business planning and strategy at HSBC. “For those companies that meet those criteria and assuming those banks have done additional due diligence on the companies concerned, then those companies can make use of the channel without the need to provide any supporting documents.”
The FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering, the financing of terrorism and proliferation of weapons of mass destruction.
HSBC believes this will encourage corporates to use Hong Kong for these types of cross-border trade, which will eventually lead to the increase in demand for onshore renminbi rather than offshore due to ample liquidity for the former.
“Some corporates, especially those MNCs with a lot of sourcing from China, may not be comfortable to use or rely exclusively on the CNH market because the volume and the pricing could be a bit volatile at times, especially when you have a big order coming in,” says Poon.