Companies that do business in China, or compete for ashare of the Chinese market's growth, should seriously considermaking the renminbi (RMB) an integral part of their cash managementstrategy. Use of RMB to settle transactions can not only improve acompany's leverage on prices with customers and suppliers, but canalso reduce financial risks the company faces, improve theeffectiveness of corporate investments, and deepen businessrelationships.

If these sound like bold claims, consider how far China hasopened itself to the world in a short time. The nation's rapidtrade growth has been pulled forward by the twin locomotives ofextraordinary domestic growth in China and increasinglytransnational industrial assembly lines. Although the nation'sGDP growth forecast this year is the lowest in 11 years, Chinacontinues to grow much faster than many other economies.

Meanwhile, the Chinese government has been loosening controls onthe renminbi to establish it as a global trade currency, aninvestment currency, and a reserve currency. In 2014, about 22percent of China's trade was settled in renminbi. HSBC expects thatshare to rise to more than 30 percent this year, and to 50 percentby 2020, as companies become increasingly aware of the potentialbenefits of invoicing and settling in the Chinese currency.

So, why should you jump on the renminbi bandwagon?

RMB can help businesses achieve more competitivepricing. The first reason to consider is thatthe combination of RMB trade settlement and foreign exchangehedging can bring companies considerable savings.

Inthe past, Chinese suppliers typically added to their quotes abuffer of between 1 percent and 3 percent in order to hedge againstthe risk that exchange rates might move unfavorably before thetransaction settled. As the yuan trading band has gotten wider, theRMB has become more volatile, which further increases the need forrisk management tools and, consequently, increases the hedgingpremium a foreign company has to pay its Chinese suppliers fortransactions denominated in other currencies.

Thus, businesses that settle in renminbi may be able to getbetter prices on materials they purchase from Chinese suppliers. In fact, in a recent global survey by HSBC that explored theattitudes and use of RMB by decision-makers at internationalcompanies, 61 percent of respondents from companies on mainlandChina said that foreign firms doing business with China gain financial advantagesby using RMB.

Improved access to new suppliers, newcustomers. In addition to improving a company'sleverage in pricing discussions, adopting the renminbi enables anoverseas business to build strong relationships with a widernetwork of Chinese partners. The renminbi is convenient for Chinesecounterparties, so importers who use it may open themselves up to agroup of Chinese suppliers that was previously unavailable: Thosethat want the ease of using their own currency, or are reluctant totake on exposure to the U.S. dollar because their cost base isdenominated in RMB.

What'smore, agreeing to do business in renminbi may pay a relationshipdividend for foreign companies looking to sell into China. AdoptingRMB can help secure market share as competitors jostle for positionin one of the world's fastest-growing consumer markets. Doing soalso demonstrates that a foreign company has a strong commitment tothe Chinese market. HSBC research predicts that the average Chineseworker's income will increase sevenfold between now and 2050, fromaround to US$2,500 per year to around $18,000 per year. Thisprojection should give some sense of the potential for growth thatthis market holds.

Improved cash management and lower cost offunds. Though the renminbi just began life asan international currency in 2009, its rapid development has beenhelped by a reduction in restrictions. Those that remain arefocused on investment flows into and out of the capital account,rather than on trade.

But regulations are being relaxed on the capital side as well.By the end of 2014, RMB-settled direct investment had more thantripled since the end of 2012, rising to ¥328 billion, asmultinationals recognized the benefits of centralizing theirtreasury operations offshore and using China's currency for localcapital injections. New developments in cash management regulationsmean that investments in China can increasingly be treated the sameas investments in any other market around the world. Obviously,this means companies can deploy funds more efficiently andconveniently.

One HSBC customer recently began to use renminbi to streamlinecross-border payments and collections. Previously, the companyconducted no business in RMB, which meant it had to settle eachcross-border transaction on an individual basis, dealing directlywith the counterparty. This approach increased transaction costsand currency risk and fragmented the company's paymentprocesses.

The company's Chinese subsidiary shifted to denominating somecross-border payments and collections in RMB and settling them on agross-in/gross-out, netting basis with the parent company'soverseas treasury center. Once the funds reach the treasury center,the company can settle directly with the counterparty in Europe,North America, or elsewhere through a payments factory or sharedservice center.

For the company, this approach manages foreign exchange exposureand optimizes liquidity management. For the Chinese government,stories like this set the precedent for other multinationals, whichwill ultimately help boost circulation of the renminbi outsidemainland China. The benefits to both Chinese and foreigncorporations in China are clear: They can potentially improve boththe speed and efficiency of payment processes, and make it easierto centralize transaction processing in a payments hub or sharedservices center. In addition, the option to denominate transactionsin renminbi makes it easier to predict payment timing moreprecisely, which enhances working capital management and cash flowforecasting.

The acceleration in China's financial liberalizationis having a profound impact on cash management. Treasury management processes that move renminbi into and out ofmainland China are evolving quickly, albeit on a pilot-programbasis or with specific eligibility criteria. Catalysts for thistransition include the need to add excess renminbi balances toglobal corporate cash pools in places such as Hong Kong, Singapore,London, and Germany, as well as the need to deploy excess globalliquidity within China, or to fund Chinese operations using moneyraised cheaply overseas.

The past year has shown the will of China to furtherinternationalize and promote the offshore usage of RMB by wideningthe network of clearing centers in new regions such as Europe,North America, and the Middle East. We anticipate that this trendwill continue—that China will further relax restrictions in thenear future, via new pilot projects for renminbi cross-bordersweeping and/or less stringent eligibility criteria. And the moreChina relaxes barriers to use of the RMB, the better multinationalsare able to connect their China-based treasury function withregional and global treasury management structures.

HongKong has played a leading role in the global expansion of therenminbi, and is still the largest and best-developed offshoremarket. But now, as the pool of renminbi liquidity grows inlocations outside of China, the need increases for an offshoreclearing mechanism that can facilitate renminbi transactions. Forexample, Singapore and London are emerging offshore renminbiclearing centers which settle both cross-border RMB payments anddomestic RMB-denominated financial activities. When the newrenminbi international payment system—Cross-border Inter-bankPayment System (CIPS)—is rolled out in China later this year, itcould link the clearing infrastructures in Singapore and London aswell. CIPS is expected to improve efficiency and straight-throughprocessing by following formatting rules similar to otherinternational cross-border clearing systems, and it's expected tocover major time zones through an extended operating window.

How Corporate Treasurers Contribute to RMBLiberalization

Financial liberalization is set to continue as the Chinesegovernment moves forward with its dual objectives of establishing renminbi as a leading global currency andestablishing cities such as Shanghai as major international financial centers by 2020.Regulators are not pursuing this strategy in isolation, however.The collaborative nature of pilot projects, and the subsequentextension of successfully piloted regulatory changes throughoutChina—impacting regulators, banks, and businesses—means thatcorporate treasurers have an important role to play in shapingfinancial liberalization and prioritizing new developments.

Treasurers need to stay up to date, not only by pursuingappropriate new opportunities to enhance their cash and liquidityposition in China, but also by understanding which pilot projectsmay be relevant to their organization. By becoming involved inpilot projects, companies can help shape regulatory changes andgain an early-mover advantage.

In short, the evolution of the renminbi represents anopportunity for foreign companies to cut costs and improvefinancial flows. Ultimately, it may also be a way to start newbusiness relationships and to tap a vast pool of aspiringcustomers. That's no small achievement for a currency still new tothe international stage.

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Drew Douglas issenior executive vice president and head of payments and cashmanagement for HSBC in North America.