The Renminbi: Why + How = Now
by Sridhar Kanthadai, Regional Head of Transaction Banking, North Asia, and Michael Vrontamitis, Regional Head of Product Management, Transaction Banking, East, Standard Chartered Bank
The rapid pace of the renminbi’s (RMB’s) internationalisation over the last 12 months has fundamental implications for corporate treasury, to the point where immediate action is required. It is no longer a case of considering what to do about the RMB, it is about actually doing it. As this article explains, it is now possible to integrate the currency into a corporate’s global working capital and liquidity management and achieve major benefits.
At virtually every step along its road to internationalisation the RMB has thrown up a succession of opportunities for corporate treasuries. Cost savings, process efficiencies, strategic flexibility and improved control and risk management are just some examples. Individually attractive, but collectively they now make the adoption and incorporation of the RMB into corporate processes virtually compulsory.
It’s all about control
The control benefits of RMB adoption come in a number of forms. As its share of global gross domestic product (GDP) increases (see Figure 1), China is likely to be an increasingly important part of many international corporates’ supply chains and customer bases in the future.
It is important that these corporates are able to take control of the foreign exchange (FX) risks implicit in this shift. This is now possible by centralising FX risk management offshore in a regional treasury centre (RTC) that can take advantage of the depth and breadth of the offshore FX market, as well as being able to choose from the most advantageous onshore/offshore market rate. Improved control of overall FX exposure is now also possible through natural hedging. Instead of having to conduct unnecessary FX transactions, RMB receipts can be directly used to make RMB payments.
Once a corporate adopts the RMB, greater efficiencies become available through more effective control of end-to-end transaction processing costs. This is particularly true in the context of China’s initiative to simplify documentation checking and policy support intended to encourage the use of RMB for cross-border trade.
Corporates that adopt RMB can improve control of their sales and purchasing processes as well. If a corporate is able to pay and receive in RMB, Chinese customers and suppliers that are unwilling or unable to pay in foreign currency immediately become accessible. An additional consideration is that where existing customers/suppliers are prepared to pay/receive foreign currency they will build their hedging costs into the price they are prepared to pay or sell at.
In most cases, this implicit hedging cost will be higher than a multinational corporate could achieve, especially as managing FX risk has become more challenging since the widening of onshore RMB FX trading band to +/-1%, which has increasing currency volatility. By contrast, a multinational corporate may even achieve near zero hedging costs if it can take advantage of the natural hedging mentioned earlier.
The adoption of RMB also provides a corporate with greater flexibility in any sales or procurement negotiations. By being able to offer RMB as an invoicing currency, corporates’ Chinese counterparties have the option of being billed or paid in their domestic currency and so avoiding any FX risk. Therefore adopting the RMB provides better control of multiple aspects of the sales and procurement process.