From the February 2012 issue of Treasury & Risk magazine

Paying Suppliers in RMB

Paying Chinese businesses in renminbi instead of dollars has advantages.

Companies in the U.S. and Europe have historically paid their Chinese suppliers in U.S. dollars. This arrangement has the advantage of convenience, as Yuri Polyakov, head of financial risk advisory for Lloyds Banking Group, outlines: “A lot of companies source things from China and they welcome the fact that they can pay in dollars instead of in renminbi—it makes their lives easier. Companies in the U.K. and Europe know how to deal with dollar flows and all they have to do is measure euro/dollar or sterling/dollar risk. For companies in the U.S. it’s even easier, as they don’t have to manage FX risk at all under this arrangement.”

However, since the launch of the renminbi cross-border trade settlement scheme in 2009, some companies have begun to realize that despite the convenience factor, paying Chinese suppliers in U.S. dollars comes with some fairly sizable disadvantages. First and foremost is the fact that suppliers are charging their overseas customers a premium for paying in U.S. dollars. “Depending on the customer, some are paying 2%, some 3%,” Polyakov says. “In contrast, when you look at the historical volatility of renminbi over the U.S. dollar, it’s below 0.5%—so paying a margin of 2% to 3% seems very excessive.” Other estimates suggest the premium could be as high as 5% to 8%.

In addition, when two parties transact in a currency that is not a base currency for either of them, it introduces a certain level of risk into the transaction. “If you’ve got a company in the U.K. buying from China in U.S. dollars, that means that both of them carry an exchange-rate risk,” says Edward Till, head of trade product for Europe at HSBC. “If you use one of the base currencies of the two entities, at least one party doesn’t have to do any hedging, so you’re taking some of the risk out of the system.”

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