Corporates take cautious stance on RMB adoption
While renminbi trade flows between mainland China and emerging markets continue to grow, many domestic and western corporates remain reluctant to trade in the Chinese currency.
There are several advantages to importers and exporters settling trades in RMB.
For the former, the Chinese exporter will no longer need to convert their US dollar receipts back into their domestic currency – a survey conducted by HSBC last year found over half of Chinese businesses questioned would offer discounts for transactions settled in RMB – while exporters who price goods in RMB eliminate FX costs for their suppliers.
The Chinese authorities have made it easier to transact in RMB by simplifying the documentation requirements and the requirement for a Chinese exporter to gain approval for mainland-designated-enterprise status before they can receive RMB has been removed, thus protecting export tax rebates.
A quarter of the non-RMB users surveyed by HSBC said they planned to use the currency within five years. “Early adopters have benefited from reduced hedging costs, improved contractual terms with Chinese suppliers and strong currency appreciation since 2009,” says Patricia Lim, head of liquidity management Asia Pacific, at RBS.
“However, many corporates are waiting to see how the currency develops.”
That calculation has been complicated by a lack of clarity as to whether the RMB is poised for a one-way appreciation bet, after authorities earlier in the day signalled a new currency policy.
According to Michael Vrontamitis, head of product management, east, transaction banking, at Standard Chartered, the number of multinational corporations switching to RMB invoicing has risen noticeably during the past 12 months.
However, the bank’s corporate-sentiment survey published in March suggests there is less willingness among onshore corporates in China to use RMB for trade settlement than their offshore counterparts.
Vrontamitis says this indicates many small and mid-sized corporates in China might need more education on the opportunities and benefits of using the currency.
“Their adoption of RMB for trade settlement is an important thrust that will push the redenomination rate from the current 20%,” he says.
Kris Bledowski, economist and director of the treasury council at the Manufacturers Alliance for Productivity and Innovation (MAPI) – a membership organization for US-based manufacturing companies – says the group has discussed the use of RMB as a trade-functional currency and are open to using it more flexibly.
“What is important to these treasurers is that they report to the CFO and ultimately how they impress the board is by lowering cross-border transaction costs as well as demonstrating insight into managing balance sheets and income statements risk,” he says.
The recent policy relaxation on cross-border two-way sweeping enables corporates not just to manage their RMB liquidity needs in and out of China more effectively but also enables them to integrate China into their regional or global liquidity management solutions, adds Vrontamitis.
“It is now possible to manage RMB as part of the multi-currency portfolio, such as in the multi-currency notional pool, where it can be used to fund borrowing in other foreign currencies and vice versa,” he says. “Apart from managing liquidity better, the treasury centre can also exercise greater control of FX exposures.”
James Kwiatkowski, global head of FX sales at Thomson Reuters, reckons customer payments or corporate activity will represent a substantial percentage of total RMB payments by the end of this decade.
“Demand is accelerating,” he says. “Renminbi trading across Thomson Reuters’s inter-dealer and dealer-to-customer foreign-exchange platforms are at record highs, and volumes on both our venues climbed to record highs in the first quarter of this year.”
According to MAPI’s Bledowski, banks have a role to play in encouraging companies to increase their RMB dealings by demonstrating their expertise in RMB-denominated transactions.
However, Vina Cheung, global head of RMB internationalization at HSBC global payments and cash management, says the decision to use the currency is impacted by the negotiation relationship between companies and their Chinese counterparts, and risk and operational considerations as well as market conditions.
“From a trade-settlement perspective, the cost of RMB is offering another financing option,” she says. “We still expect it to account for one third of China’s external trade settlement by 2015, which would make it the world’s third-largest trade currency.”
According to Cheung, there is no indication that companies of a particular scale or from specific industry sectors are using the currency more actively.
“RMB is already a functioning treasury-management currency with its participation in cross-border movement of funds, and offshore entities of many corporates are seizing opportunities to improve global working capital management involving China,” she says.
“However, more investment and funding/financing product development is required in offshore markets in order to demonstrate to corporates the full value of incorporating RMB into their global treasury function.”