WASHINGTON, D.C. – Monday at the 2014 AFP Annual Conference, treasury and finance professionals received a glimpse into how renminbi (RMB) cross-border trade has taken off in the five years since regulators permitted the first pilot.
The history of RMB cross-border trade is a short one, beginning with the first liberalization moves in 2009, followed by a gradual widening in 2012, and finally Chinese regulators last year giving the go-ahead to much simplified documentation for trade settlements.
As Caroline Owen, regional head of RMB solutions, Americas, at Standard Chartered Bank noted, the use of RMB for trade settlement has increased more than fivefold since late 2011, although the currency still represents just 1.64% of all world payment currencies. This has, nonetheless, been enough to raise it to seventh ranking, behind the US dollar, the euro, the British pound, the Japanese yen and the Australian and Canadian dollars.
Why should more multinational corporations consider invoicing in RMB? Owen offered three major reasons:
- Improve their profit margins
- Grow their market share and
- Reduce their administrative burden.
“Improving RMB FX in the offshore market can also be used for cost savings as Chinese companies no longer have to bear the hedging responsibility,” she added. “However, we have recently been seeing more two-way volatility in the currency.”
Having the ability to receive payments in RMB opens up opportunities for MNCs to reach more potential buyers in China. Additionally, settling trade in RMB is faster and more efficient than in another currency, involving far less paperwork.
Most recently, the launch of RMB-denominated commodity contracts marks a further major development as the currency will flow offshore more, in addition to impacting on supply chains. RMB-denominated gold contracts have now launched on the Shanghai Free Trade Zone (SFTZ).
“The launch has given China a boost in redefining the price of commodities and broadening the use of its currency in the offshore market,” added Owen.
Taking the plunge
Among the MNCs that have already taken the plunge and used the RMB for invoicing is software company VMware. When it began invoicing in foreign currencies in 2009, the company was keen to include the RMB from the outset although the Chinese currency was not then yet tradable. However, by the following year that situation had begun to change.
“Much of VMware’s revenue goes through our partners and dealers in China, who previously dealt in the US dollar (USD),” said its treasurer, Tina Kobetsky. She told her audience that initially, invoicing in RMB had been a complicated0—and tedious—process. However, the sales team’s conviction that sales and margins would benefit from VMware’s ability to price in the local currency had driven the process.
The company had been trailblazing in unfamiliar territory, with few others offering experience for VMWare to draw on, but this did not deter it from starting to invoice in RMB from mid-2013 onwards. A RMB price list dovetailed with the company’s worldwide pricing and the Chinese currency was integrated into its enterprise resource planning (ERP) system.
“This involved educating our partners, who'd grown accustomed to years of dealing in USD only,” said Kobetsky. “It also meant that submitting documents to China's State Administration of Foreign Exchange [SAFE] was no longer necessary.”
VMware had encountered several other obstacles, such as the governing rules still being in a state of flux (with varying interpretations of those rules) and not having been widely tested, while some partners and vendors had proved resistant to change.
Nonetheless, after the first year of RMB invoicing the company can report that “invoicing and revenue recognition in RMB has been smooth, with the first remittance recorded in a Hong Kong account in under 60 days from the invoice date,” said Kobetsky. To date, there had also been no major collection issues.