From the October Special Report issue of Treasury & Risk magazine

China Makes Life Easier for Treasuries

The central bank OKs renminbi cross-border sweeps, giving trapped corporate cash an exit route.

China has made big strides in liberalizing its currency over the last few years and now it is taking steps to facilitate cross-border sweeps of the renminbi, a development that will make life easier for treasuries that operate in China.

Recently, the People’s Bank of China (PBOC), the central bank, said that it will allow companies to sweep cash offshore.

“The implementation of this movement of funds is conducted through an intercompany loan,” said Joe Ng, Asia Pacific head of Renminbi payments product management for Global Transaction Banking at Deutsche Bank.

Corporate treasuries often sweep funds out of local business units’ bank accounts to regional treasury centers to gain liquidity and transparency and to make short-term investing more efficient. Previously, companies could move renminbi out of China to regional treasury centers by paying dividends, but that approach could trigger withholding taxes.

The PBOC’s announcement about cross-border sweeping followed a pilot program that began in December 2012. The PBOC is currently operating a pilot program for foreign-currency netting in a few Chinese cities.

The PBOC has yet to release details on cross-border sweeping, Ng said. “We are still waiting for clarity about how much you can move, what the timing is, and the operating procedures around these arrangements,” he said.

Citibank responded to the PBOC’s move by launching a product in September that automates renminbi cross-border sweeping. Rachel Wang, treasury advisor for Citi Treasury and Trade Solutions in Shanghai, said the solution “gives our clients more convenience to leverage this new PBOC announcement.”

“Because of the FX restrictions, trapped cash in China used to be a big challenge for multinationals’ liquidity management,” Wang said. With the advent of sweeping, “the trapped cash problem can be solved to a great extent,” she said.

“Most of the interest comes from multinationals,” Wang said. For global treasury operations, “China was a missing piece. For multinationals, it’s good to have China being part of the global family, to start netting, [pay-on-behalf-of, receive-on-behalf-of structures] or cash pooling to their global or regional treasury centers,” she said.

Deutsche Bank’s Ng also cites “very strong interest” among multinationals in being able to move cash cross-border.

Joe Ng of Deutsche Bank“If we think about the global treasury management strategy of multinationals, previously what they could do in China was mostly concentrate on current account items, or what we call trade settlement,” said Ng, pictured at left. “The use of renminbi for trade settlement in itself can create value. But the movement of these intercompany loans will help increase the flexibility of multinational companies to manage their renminbi positions on a global basis, essentially using the currency for treasury management. It will also enable the repatriation of funds from China through the intercompany loans.”

He added: “We see this as a tipping point for more use of renminbi for both trade and investment.”

The internationalization of the renminbi involves more cross-border use of the currency, Ng said, adding that offshore renminbi currently makes up less than 1% of the currency’s global total, with 99% on shore.

Ng pointed out that SWIFT’s research indicates that while China constitutes nearly 10% of the world’s GDP, only about 1% of global foreign exchange activity occurs in renminbi. And while more than 30% of Japan’s trade is transacted in yen and 60% of the eurozone’s imports and exports are denominated in euros, 16% of China’s imports and exports are denominated in renminbi, he said. “So from a transactional point of view, there is room for the renminbi to rise.”

The renminbi, also known as RMB, has definitely come a long way since China started its liberalization in 2009. In September, the Bank for International Settlements’ triennial survey of global foreign exchange trading showed the renminbi for the first time ranked as one of the world’s ten most frequently traded currencies, rising to ninth place, up from number 17 three years ago.

“That shows you how the rule changes have just made it easy for companies all over the world to deal with the RMB,” said Alfred Nader, vice president of corporate strategy and development at Western Union Business Solutions.

Still, an HSBC survey released this summer found that just 9% of U.S. companies doing business in China paid with renminbi. But HSBC cited SWIFT data showing that 47 countries now make more than 10% of their payments to China and Hong Kong in renminbi.

Michael McDonough, senior vice president and head of product, global trade and finance receivables in North America at HSBC Bank USA, N.A., said companies aren’t yet as familiar with using the Chinese currency as they may be with other leading currencies. According to the HSBC survey, 67% of U.S. companies that weren’t using the renminbi said it was because they weren’t aware of the benefits or hadn’t fully considered it, while 40% cited a preference for using dollars or an interest in avoiding forex fluctuations. Just 26% had concerns about regulations.

“What you’ve got here is a situation where there’s a need to educate the market,” McDonough said. “What companies are going to find is that dealing in the RMB will prove to be largely akin to other FX transactions that companies have gotten their arms around.”

Alfred Nader of Western UnionMcDonough cited the advantages that paying in the Chinese currency can provide, such as better pricing. And McDonough noted that financial institutions outside of China are “increasingly able to provide renminbi financing to exporting clients in their particular region.”

Western Union’s Nader also cited the advantages of paying in renminbi (RMB). “If they negotiate in the RMB, companies get upwards of 5% off of their invoice,” said Nader, pictured at left. “And they can get more attractive payment terms. The Chinese have been hesitant to offer payment terms longer than 30 days because of the U.S. dollar weakening. But if they’re being paid in RMB, you’re seeing companies being able to hold onto their money longer.”

Nader said that U.S. companies’ use of the renminbi could gather momentum if some of the big U.S. importers of Chinese manufactured goods make the switch. “If companies like Wal-Mart and Target start to pay their Chinese exporters in the RMB, you’re going to see a huge domino effect,” he said. “All the smaller folks are going to have their suppliers asking to be paid in RMB.”

Read the October Special Report on SEPA.

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Ready, Set, SEPA
Corporate Perspective on SEPA
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SEPA: The Gateway to New Value-Added Services

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