The renminbi and cross-border trade: sightings of Bigfoot
The renminbi will become as integral to global trade as letters of credit or the container ship. Companies need to think carefully on how to blend daily RMB usage into their existing supply chains as Beijing begins to remove bureaucratic FX hurdles.
Like the country itself, China’s currency is viewed in the west with an almost fearful reverence. Indeed, the elusive renminbi (RMB), or people’s currency, has gained an almost semi-mythical status in the west.
It’s a bit like Bigfoot: rarely seen, yet known to be lurking in the wild, quietly building its strength before emerging to devour anything in its way.
It doesn’t have to be this way. The renminbi will become as integral to global trade as letters of credit or the container ship. Or indeed the US dollar.
Will the RMB, also called the yuan, ever replace the greenback as the world’s currency of choice? That’s possible, though not in the short term. First, China needs a healthy double-bout of liberalizing– interest rates, exchange rates – and stiffening: adding brawn to a flabby bond market and banking system. Then it needs to open its capital account and let money flow freely across its borders.
Multinationals operating in China have long complained about the amount of paperwork required to transfer capital across borders, and even within the mainland divisions of a corporate group.
Progressive, business-friendly regulations are now gathering pace. Global corporates can channel RMB into the mainland to finance their local operations, or to process cross-border trade settlements. An expansion of the RMB qualified foreign institutional investor (RQFII) scheme, heralded in November, expanded the total RQFII quota three-fold to Rmb270 billion ($43 billion), allowing investors to channel offshore yuan-denominated funds into Chinese stocks and bonds.
Most notably, a pilot scheme announced in September allows Shanghai-based corporations, both domestic and foreign, seamlessly to transfer cash to their offshore organizations in the form of intra-group loans.
“It’s easier than ever to move RMB offshore,” says Allan Zhang, a director at PwC’s advisory services unit. “It’s a sign of the RMB’s transformation from a currency that promises to be real to one that is real.”
Predictions about the redback’s projected rise abound, with the consensus view that 20% of all African sovereign reserves might be held in RMB by 2015, 50% of all emerging market global trade could be settled in yuan by 2016, and Beijing could make its currency fully convertible by 2018.
This will impact corporates in different ways. Energy majors won’t feel much change: oil and other natural resources will remain dollar-priced commodities on international exchanges for decades to come.
Corporates that interact heavily with China, notably on the sourcing and sales sides – big engineering/auto firms, fast-moving consumer goods, upscale brands – will be inevitably required to blend daily RMB usage into existing supply chains.
The process might be dizzying, as chief operating officers learn to deal with a more volatile offshore RMB, while smoothing out variations between onshore and offshore RMB. They’ll have to learn how to hedge that process as well.
To that must be added a plethora of more mundane, but no less vital, trade-related questions, such as: how, as a chief executive, do I manage my cash in China, change payment systems, pay suppliers, find out about best practices from other corporations and keep up with regulatory changes?
In most cases, a fair bit of hand holding by banking providers will help. In fact, Jason Bedford, senior manager, financial services at KPMG in Hong Kong, reckons the impact of RMB internationalization “is probably being most keenly felt by the banking sector”. An inability to create the right yuan-related service to order might put a bank, he adds, “at a competitive disadvantage to its peers”.
For any chief executive understandably curious – and they should be – about how the RMB will change the way they operate, perhaps the best thing to do is to go to a country where yuan-denominated trade is commonplace.
Start with Vietnam or Mongolia, where the power and prevalence of Chinese trade have created a thriving, formal RMB market. Then head to the rest of southeast Asia – from Myanmar to Indonesia – Siberian Russia and the more southerly reaches of sub-Saharan Africa.
“There’s a clear incentive for companies in these areas to hold and trade in RMB,” says Qinwei Wang, China economist at London-based Capital Economics. “If you want to learn about the RMB as a tool of future global trade, you should get on a plane and head there.”
And if you’re really lucky, you might see Bigfoot out of the window.