Managing the RMB - Benefits for buyers, sellers

CHINESE companies can potentially add up to five per cent to their quotes in foreign currencies to capture the cost of bearing exchange risk. If RMB is used, these costs can be removed . . .

IN a new RMB Handbook just published, ANZ Bank details a number of benefits which can flow through to corporates using the RMB as a trade invoicing and settlement currency. It says these benefits can include:
n Potentially lower import prices and higher export prices – because the Chinese business no longer needs to add a buffer for foreign exchange risk;
n Creating an ability to extend payment terms beyond 90 days relative to trading in a foreign currency — where there are more
restrictions on the Chinese company. This extension can lead to improved sales and working capital;
n Increasing the number of potential new customers and suppliers in China who prefer to deal in RMB.
ANZ says Chinese companies can potentially add up to five per cent to their quotes in
foreign currencies to capture the cost of bearing the exchange rate risk. If RMB is used to invoice and settle, these additional costs can potentially be removed. “Furthermore, given the increased RMB liquidity and interbank connections offshore, foreign trade partners are able to hedge the RMB exchange rate risk at a lower cost compared to RMB hedging costs onshore,” ANZ says.
“This is a benefit that both Chinese companies and their trading partners can share.”
In reference to payment terms, ANZ says that, currently, where an import or export
invoice is denominated in a foreign currency, and its payment terms are over 90 days, the transaction becomes administratively complex due to rules imposed by China’s State Administration of Foreign Exchange (SAFE).
“This can limit tactical initiatives to improve working capital or to improve sales by offering extended terms to customers. Settlement in RMB offers the benefit of a potential extension of payment terms without the complex administrative requirements.”
ANZ says that negotiation of increased sales volumes in exchange for extended payment terms provides major capital benefits to
Chinese buyers.
Generally speaking, interest rates are higher in China because many businesses are funded through shadow banking. “By extending payment terms, foreign exporters are providing liquidity to Chinese customers. This can be an effective way of growing sales and/or attracting more Chinese buyers.”
ANZ says that longer payment terms allow Chinese importers to achieve better working capital efficiency and a lower average cost of funds. “Using RMB as the payment currency enables terms to be extended past 90 days, providing larger working capital benefits.”
A large number of Chinese companies have yet to develop foreign currency capabilities.
“Therefore, the ability to settle payments in RMB will allow foreign companies to access a broader range of buyers and suppliers, and so reduce buyer/supplier concentration risk —while also lowering credit and reputational risk.
“Use of RMB in trade invoicing and settlement may also strengthen the relationship with existing Chinese buyers and suppliers.”
ANZ’s RMB Handbook is divided into six chapters – The RMB Internationalisation
Journey; The New Currency of Trade;
Navigating China’s Foreign Investment Landscape; Financing Solutions; Managing Risks and Exposures; and Cross-Border Liquidity Management.
Visir www.anzrmb.com

More banks support
RMB transactions  as real benefits show

BRUSSELS — New data from SWIFT (a global society of financial institutions) shows that growth in RMB payments is supported by an increasing number of banks worldwide.
In May 2015, 1,081 financial institutions used the RMB for payments with China and Hong Kong, representing 35 per cent of all institutions exchanging payments with the latter across all currencies, a 22 per cent increase in the number of institutions using the RMB and a 6.0 per cent increase in adoption, up from 29 per cent two years ago.
Surendra Rosha, HSBC Head-designate of Financial Institutions Group for Asia-Pacific, says the data makes it clear that RMB is becoming increasingly central to the business banks do with China and Hong Kong.
In May 2015, RMB adoption for payments by financial institutions in Asia Pacific increased to 37 per cent from 33 per cent in May 2013.
During the same time period, the Americas
experienced even stronger growth, with financial institutions increasing their use of the RMB for payments by 10 per cent, leading to 37 per cent adoption. Europe followed closely with 33 per cent adoption and Africa-Middle East with 28 per cent.
“Every month we witness new proof of global RMB adoption,” says Michael Moon, SWIFT Head of Payments, Asia Pacific.
“The number of banks that use RMB for payments with China and Hong Kong is a key
internationalisation indicator. This large
number also shows that many banks, across the globe, may have an interest in connectivity to the China International Payment System that China will launch by end of the year.”
Overall, SWIFT says the RMB strengthened its position as the fifth most active currency for global payments in value and accounted for 2.18 per cent of payments worldwide in May 2015. Although all currencies decreased in
value by 3.1 per cent, RMB payments increased in value by 1.99 per cent compared to April 2015, leading to the RMB’s record high share in global payments.