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Business/Finance See other Business/Finance Articles Title: Bank promotes renminbi as international currency As liberalisation of the use of China’s currency across its borders continues, we believe it is critical to implement a robust RMB strategy as quickly as possible Accelerate your China Strategy: Top reasons to start using the renminbi China’s rapid ascent as a major global economy makes it too big to ignore for international companies around the world. As the manufacturing “workshop of the world”, China plays a critical role in many companies’ global supply chains. Its large and increasingly affluent population also makes the country a key target destination for exporters. The opportunities are huge, but there are also signs that many companies could do more to streamline trade and reduce the costs of their cross-border transactions with China. A recent HSBC survey[1] indicates that only a fraction of firms (22 %) are using the renminbi (‘RMB’) for trade and settlement with China. The other 78% could be missing out on a range of important advantages relating to switching to renminbi. As liberalisation of the use of China’s currency across its borders continues, we believe it is critical to implement a robust RMB strategy as quickly as possible. 1. Lower transaction costs Apart from the greater convenience and reduced risk for the Chinese counterparty, one of the key benefits in using RMB for trade settlement with China is the possibility of a ‘natural hedge’. This presents an opportunity to reduce overall foreign exchange costs, and the savings may be enjoyed by both sides. In addition, as interest rates in China are relatively high, if the Chinese counterparty has a working capital gap that it is financing onshore, there may be a way for the offshore party to finance the gap at a lower rate and share the benefit with its counterparty in China. Since interest rates in China are relatively high, Chinese counter parties with a need for working capital may be able to obtain financing at a lower interest rate off-shore. The costs savings’ benefits can be shared with the Chinese counterparty. 2. Reduce exchange rate risk With a natural hedge in place i.e. receivables/payables and assets/liabilities in the same currencies, the companies can potentially reduce their exposure to exchange rate volatility. The recent movement of RMB’s exchange rate, along with the widening of the daily trading band for the onshore spot rate from +/- 1% to +/-2% make this even more of a priority for companies in China. 3. Gain market share Companies in China with an RMB cost basis are likely to prefer partners who are willing to settle for trade in the local currency. Willingness to use renminbi may open new avenues in China and strengthen existing relationships. By making it easier to do business with your organisation, you can help your company build market share. In our survey, 47% of companies using renminbi believe it enables them to win more business. 4. Better manage liquidity between China and global operations For multinational companies (MNCs) with operations in China, a major benefit derived from the relaxation of cross-border renminbi policy is the improved ability to use onshore liquidity to support funding needs outside of China. Historically, repatriation of liquidity from the country was only possible by way of paying a dividend—a cumbersome and expensive process. Changes in renminbi regulation can gradually reduce these barriers. For example outbound intercompany loans between Chinese corporates and their overseas affiliates are now permitted in most parts of the country without the need to obtain regulatory approval. In addition, companies in the Shanghai Free Trade Zone can now sweep funds between their offshore and onshore RMB cash pools, on an automated basis as often as on a daily basis. This gives MNCs the ability to fund their working capital needs internally and to incorporate excess cash from China into regional or global liquidity structures, thereby improving the efficiency of their capital. [1] HSBC, RMB International Study 2014 (June 2014). For more RMB survey content please access the links below: Trading in Renminbi: Reducing costs, managing risks China liberalising, renminbi rising Renminbi: a new reserve currency Post Comment Private Reply Ignore Thread
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