MIAMI – Corporates could save as much as five percent on every transaction if they use the renminbi when making payments to China, one FX expert says. In a session at NACHA’s 2012 Global Payments Strategies Conference, Alfred Nader, vice president, corporate strategy and development at Western Union Business Solutions, urged corporates to trade in renminbi with their Chinese business partners rather than U.S. dollars.
Earlier this year the Chinese government allowed all companies in China to make and receive cross-border payments in RMB—a significant breakthrough for treasurers. That’s because trading in renminbi eliminates the need for Chinese companies to go through an FX cancellation procedure and receive permission from China’s State Administration of Foreign Exchange to convert other currencies into renminbi, Nader said. Additionally, treasurers no longer have to worry about exchange rate fluctuations. “They can actually bill exactly what they want to get,” he said. “This is huge.”
Opening up the renminbi
Although the decision by the People’s Republic is fairly recent, the Western press has paid scant attention to it. “This is really opening up the Chinese markets in a way that we’ve never seen before, and it didn’t make the pages here in the United States,” said Nader. “I looked at the Financial Times, I looked at The Wall Street Journal, I looked at these business publications, and maybe there was something on page 19.”
In fairness, even many Chinese companies are still unaware that trading in renminbi is allowed, Nader explained, but they benefit as well. “China has export-related tax rebates so to encourage trade, to encourage their companies to export, they give them money back. It varies anywhere from three to 15 percent, depending on the product,” he said.
Savings for U.S. corporates
WUBS performed a study to determine how much Chinese exporters charge their trading partners to safeguard against foreign exchange fluctuations, and found that one in five companies adds fees or surcharges, with the average fee being three percent. “For every $1 million that you’re importing from China, you’re essentially paying an extra $30,000,” Nader said. “In this economic environment, none of us would like to just look away from $30,000 in potential savings.”
Backing up the WUBS study was a statement from the People’s Bank of China in late October that importers can save between two and three percent by negotiating in renminbi. A recent study by Deutsche Bank was even more impressive, putting the savings at close to five percent. “Look at how many goods are actually made in China,” Nader said. “Think about the effect. What if the large companies of the world started to push their suppliers in China to be billed in the Chinese renminbi? Recently IKEA came out and said they started doing this. It’s a significant amount of money that could actually be saved.”
Rules to know
There are some rules that U.S. companies need to be aware of when paying in renminbi. If making a payment to mainland China, trading in renminbi is only allowed if it is for trade-related purposes. However, those rules do not apply for territories outside of mainland China, so payments can be made for any reason. “In Hong Kong and Taiwan, there’s a lot of interest and a lot of volume coming into those countries in the Chinese renminbi,” said Nader. “You may see that loosening take place in [mainland] China over the next 12-18 months. But right now, you can’t send payments to individuals in mainland China.”
Nader encourages corporates to negotiate with their Chinese suppliers and ask them if they would prefer to receive renminbi. He noted that even if corporates only save one percent by trading in renminbi, it is worthwhile because they’re saving $10,000 for every $1 million.
Trading in renminbi also benefits U.S. exporters, particularly those just entering the Chinese market, Nader added. “How about telling your potential clients in China that they can pay you in their own currency?” he said. “We need to look past the U.S. dollar being king.”