Despite the spectacular economic development China has engineered, the use of the renminbi (RMB) has not grown at the same pace as the country’s industries. Many U.S. businesses that source from China continue to pay their suppliers in U.S. dollars. Doing so is convenient, and it eliminates foreign exchange (FX) risk in those transactions. It also costs more, and it puts these companies at a disadvantage compared with businesses that are willing to transact in RMB.
As China has liberalized the RMB over the past decade, an increasing number of European, Australian, and Asian companies have begun making RMB-denominated deals. If China continues to experience a credit squeeze and deceleration in economic growth, U.S. companies may find themselves under increasing pressure to use the local currency when working with Chinese trading partners. The time is right to evaluate the pros and cons of paying and billing in RMB.
Global Growth for the RMB
China’s efforts to boost global use of the RMB have been somewhat successful. According to SWIFT, the value of RMB-denominated payments expanded 171 percent between January 2012 and January 2013. In fact, in the three months from December 2012 to March 2013, RMB payments rose in value by 32.7 percent, whereas the value of payments in other currencies rose an average of 5.1 percent. Globally, 29 percent of the 160 nations that exchanged payments with China and Hong Kong in April 2013 denominated at least 10 percent of those transactions in RMB. That’s an increase of 10 percentage points (almost 50 percent) since July 2012.
Benefits of RMB Transactions
As they become more comfortable with their ability to mitigate FX risk, U.S. companies should consider paying Chinese suppliers in RMB. One significant reason is that the PBOC estimates transacting in U.S. dollars increases the cost of a transaction in China by 2 to 3 percent, which equates to US$10,000 to US$15,000 on a US$500,000 invoice. Other estimates peg the premium for trading in USD as high as 5 percent. Chinese companies factor RMB appreciation into their price to hedge against the possibility that the exchange rate will move unfavorably before the trade is settled. This buffer means that U.S. companies are paying a premium for transacting in USD.