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RMB Internationalization: How Treasurers Stand to Gain

  • By Michael Rugilo and Barbara Herbert
  • Published: 8/28/2015
RMB1With the liberalization of the Chinese renminbi (RMB) continuing to pick up pace, and the current devaluation shocking many market participants, corporates can find it hard to keep track of the latest developments. However, European treasurers have much to gain from RMB internationalization—if they can cope with a volatile currency.

The benefits for European treasurers of settling payments in RMB are clear. First, it may drive lower costs; when importing goods and invoicing, using RMB means that Chinese trade partners can offer better rates as they bear no exchange risks. Second, it poses opportunities for expansion; businesses in China less familiar with hedging currency risks may be more interested in trading with a company with the ability to settle in their local currency. Moreover, growing possibilities with respect to RMB cash pooling and cross-border lending, as well as further development of global and European clearing hubs such as Frankfurt, will continue to make the RMB’s trading process easier and more transparent for European treasurers.

Yet the best way to seize these opportunities is less defined. Indeed, now that many see the RMB’s devaluation as an indication of Chinese growth rates slowing, there are new uncertainties to manage. As such, we outline the key developments—showing both how European treasurers can navigate the new environment, and how they stand to profit.

A year of progress

The RMB’s recent growth stems partly from the establishment of the Frankfurt clearing hub, improving accessibility to the currency. This development has also led to an increase in the number of European treasurers embracing the ability to invoice in RMB, reaching more buyers in China and negotiating better trade terms. Opening accounts in RMB allows treasurers to improve their ease of access to payment transactions. In addition, we continue to witness a boost in offshore RMB deposits outside China. Indeed, given the current low interest rates in the eurozone, RMB deposit rates can be very attractive to European finance officers.

Another major recent consequence of liberalization—from which treasurers particularly stand to benefit—is that China is no longer considered a cash trap. Over the past two years, Chinese authorities have gradually relaxed rules to enable treasurers to bring their China operations into their global liquidity management pool. For example, through the use of ‘cross-border lending’, RMB liquidity can now be brought outside China for up to a year. Treasurers have embraced this positive development, actively using cross-border lending to release trapped liquidity from within China.

However, recent movements in the RMB’s value are proof for those treasurers who have argued—for quite some time—that RMB should be actively hedged. Higher volatility requires the use of hedging products such as FX forward contracts and currency swaps, which as our clients know reduce risks.

Important enablers of RMB internationalization

Looking ahead, three key developments will be most significant for RMB’s path to further internationalization.

The first is the extension of the Shanghai Free Trade Zone (FTZ). The original FTZ aimed to test the impact of free market reform and the liberalization of foreign exchange policies on its economy. Following its success, the area was enlarged to stimulate cross-border trade and investment flows, whilst boosting domestic services and innovation. Ultimately, we expect this expansion of the Shanghai FTZ to speed up reforms, aiding the RMB’s role internationally.

A second driver is increased access to investment products. The Shanghai-Hong Kong Stock Connect—a pilot program linking the two stock markets—will be pivotal in this respect. Under the program, investors in Hong Kong and mainland China can trade and settle shares listed on the other market via the exchange and clearing house in their home market. This development will help China drive forward in opening its capital markets to more international investment, which will arise as the RMB becomes accepted as an investors’ currency.

A third and important influence on RMB’s internationalization will be its potential inclusion in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) currency basket. With RMB already widely used in international trade and finance transactions, and with rising cross-border trade and increasing foreign interest in China as an investment destination, Beijing strives for its currency to become an official reserve currency by the IMF, alongside the dollar, euro, sterling and yen.

Challenges and opportunities

Such liberalization steps illustrate the need for treasurers to examine their own treasury setup, to determine whether it is adequately aligned to cope with even greater RMB fluctuations in the near future. As hedging products become increasingly available this does not represent a problem for corporate treasuries. On the contrary, a decrease in regulation is expected to simplify doing business with China in many aspects. The latest market movements indicate the need to take RMB hedging seriously, as the relatively stable price movements seem a thing of the past. Today, treasurers can hedge their RMB exposure during both Asian and European trading hours, a positive development for business.

The challenge is no longer a technical one for European and international corporate treasurers to develop their China business. Instead, the question now lies in the time it takes to realize the potential for RMB, and to adapt their existing procedures to incorporate the emerging Chinese currency.

Michael Rugilo is Asia expert at Commerzbank corporates and markets, and Barbara Herbert is a renminbi specialist for Commerzbank transaction services.

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