Amid the U.S. federal government shutdown and near default, a frustrated China called for a “de-Americanized world.” Whether that happens remains to be seen, but one thing is sure: China would like nothing better than its renminbi currency to replace the U.S. dollar as the international currency of choice.
With the RMB ascending in popularity, AFP has released a new publication to help treasurers leverage the new RMB offerings. The CTC Guide to the Internationalization of the RMB: A Treasury Perspective
is designed specifically for corporate treasury and finance professionals.
Chinese authorities recently took two important steps toward further liberalizing trade in RMB and opened the spigot on lending excess onshore RMB to foreign affiliates and even unrelated parties, explained author Nilly Essaides, AFP’s Director-Practitioner Content Development. First, they relaxed rules regarding the documentation needed to export and import transactions that are denominated in RMB. “Some of the documents can be electronically filed and all of the paperwork goes through the bank instead of Chinese authorities, significantly speeding up the process of collections of RMB invoices,” she said.
Second, they allowed companies to sweep excess RMB from their onshore subsidiaries to a finance center or another affiliate. “That relieves the pressure on companies that have accumulated surplus cash in China but have had difficulties repatriating it,” Essaides said. “That’s because the rules on repatriation are based on retained earnings, not just free cash flow, and because of biting tax consequences to pure repatriation—the reason many U.S. companies leave their cash offshore.”
Now that the money can be swept, essentially through an intercompany loan to an offshore entity, companies can begin to manage China liquidity alongside the rest of their global liquidity management strategy rather than as a one-off proposition, Essaides noted. “They can also centralize and hedge RMB risk in the offshore market and settle in CNH,” she said. “What these two new rules basically do is allow companies to bring China into the fold of global liquidity and risk management operations, in a way they couldn’t before.
“Combined with the September 27 launch of a free trade zone, the signs are clear that China is moving closer to the liberalization even of its capital account,” she added.
While other RMB articles and guides tend to be generalized, the CTC Guide to the Internationalization of the RMB
focuses on one aspect—paying in RMB. Essaides explained that development has the biggest impact on treasurers, while other developments are still embryonic. “These new changes make it possible to more easily invoice in RMB, which means U.S. companies can change their currency of billing and payment in China to the RMB and handle the payments and collections from an account typically in Hong Kong denominated in CNH—the offshore RMB,” she said. “That means cutting out the middleman and expanding the supply chain in China in strategic ways.”
The new sweep program began as a pilot with Ford and other companies in March and is now available to everyone. “That’s a huge and exciting change and we wanted to explore the risk, liquidity and operational and strategic implications of these two important changes,” Essaides said.
The guide, underwritten by Standard Chartered Bank, also includes case studies to give treasurers real-world examples of peers who already are taking advantage of the RMB liberalization. “U.S. companies seem to trail European companies in denominating payments and invoices in RMB, but they’re getting there. Treasurers are naturally cautious—as they should be,” Essaides said. “And the environment in China is still fluid; what the authorities approve for one company, they may not approve for another. That makes treasurers hesitant to jump on new opportunities and be the first ones.”Download the CTC Guide to the Internationalization of the RMB here.