Deutsche Bank
Global Transaction Banking
The Renminbi:
2014 and beyond
Translating developments into tangible business opportunities
Deutsche Bank
The Renminbi: 2014 and beyond
The purpose of this whitepaper
As internationalisation of the Renminbi continues at
a rapid pace, actively driven by China’s economic
strategy, corporates must ensure they’re positioned
to translate the currency’s development into tangible
business opportunities.
This applies to any corporate that has (or is likely to have) any form of
exposure to the currency, whether via trade connections with China, an
onshore branch or subsidiary, or where Renminbi payments constitute a large
part of treasury risk. Certainly, corporate treasurers in particular have much to
gain from adopting the Renminbi – no longer idly cited as the currency of the
future, but quantifiably and undeniably the currency of today.
The Renminbi
has been cited
quantifiably
and undeniably
the currency
of today
Of course, making the switch is undoubtedly a complex undertaking. With
this in mind, this Deutsche Bank whitepaper, coming in addition to regular
Renminbi updates, outlines the benefits of utilising the Renminbi as a treasury
management currency, alongside its investment possibilities, and addresses
the challenges companies will face in this respect.
3
Deutsche Bank
The Renminbi: 2014 and beyond
Switching to the Renminbi
In order to convert Renminbi-related regulatory and
market developments into real business benefits,
corporates must first gain a clear understanding of
the currency’s continued (and policy-driven) upward
trajectory, and the opportunities this creates.
As a trade settlement currency, the Renminbi is already employed in the
same way as the US dollar and euro, in that it can be used as the underlying
currency for Letters of Credit. Its use in this respect has grown exponentially
since the 2009 launch of a cross-border settlement pilot programme. Just four
years later, the Renminbi moved ahead of the Hong Kong dollar and Singapore
dollar to become the eighth most-traded world currency, and overtook the
euro to become the second most-utilised currency in trade finance. The speed
of progress has been phenomenal. In the last month of 2013, the value of
Renminbi used globally rose by 15%, compared to a 7% increase for other
currencies.
The growing importance of the currency can be seen not just in these rising
figures but also in the Renminbi’s increasingly international reach. As of
October 2013, the top three markets (outside of China and Hong Kong) using
the currency for trade settlement were Singapore, Germany and Australia.
While the Asia/Australia bias is hardly surprising due to geographic proximity,
its growing use as a trade settlement currency in Europe is notable. And it’s
not just Germany that is embracing the currency; France is also realising the
competitive advantages to be gained from Renminbi-denominated trade, with
nearly 10%1 of Sino-French trade now settled in Renminbi. In fact, Renminbi
settlement in EU-China bilateral trade is likely to triple to 5-6%2 of China’s
global trade within the next three years.
In one month
alone (between
November and
December 2013)
the value of
Renminbi used
globally rose by
15%
Looking further afield, use of the Renminbi as a trade settlement currency
is also expected to pick up in emerging markets. Africa is a prime example,
with swift progress expected thanks to the region’s burgeoning bilateral trade
flows with China, its largest trading partner3.
http://www.euromoney.com/Article/3201243/European-capitals-scramble-to-arrange-currency-trade-deals-with-China.html
June CNH Market Monitor
3
http://www.fxweek.com/fx-week/feature/2254234/renminbi-hedging-and-africa-the-final-frontier
1
2
4
Deutsche Bank
The Renminbi: 2014 and beyond
Two key factors lie behind the currency’s continued advance. First is China’s
economic strategy. A determination to internationalise the Renminbi as
a means to economic growth has sparked a series of policy changes
designed to improve the currency’s accessibility. For example, documentary
requirements have been significantly eased for corporates boasting good track
records, and Renminbi trade transactions are now available electronically. This
not only immediately enhances ease-of-use, but also ties in with corporates’
growing demand for the automation of processes and resulting efficiencies.
Second, and adding real momentum to the growth kick-started by such
policy-driven developments, are the commercial benefits to be gained
from settling obligations of Chinese enterprises in Renminbi. Certainly, for
foreign corporates with commercial flows with China, there are practical and
quantifiable benefits to pricing and accepting payment in Renminbi. By being
able to forgo the often costly surcharges associated with acquiring a foreign
exchange quota and hedging currency exposure using onshore rates, Chinese
corporates could reduce their transaction costs with foreign companies
and pass along savings of around 3-5%, and even up to 7%. For companies
in lower-margin businesses, for example importing consumer goods or
electronics from China, a saving of this magnitude could have a significant
impact on their bottom line.
In addition, for foreign companies with a growing presence in the country,
adopting the Renminbi will enable them to self-fund investments and/
or expand their market share with greater flexibility than if they had to
raise Renminbi from the market. This is because onshore access to foreign
currencies isn’t always straightforward, potentially limiting a company’s
Chinese customer base. With the Renminbi, such limitations disappear; a clear
motivation for making the switch.
Ultimately, for corporates with any form of commercial exposure to China
or its internationalising currency, the ability to use the Renminbi is both an
immediate competitive advantage and vital to future strategy.
5
Deutsche Bank
The Renminbi: 2014 and beyond
Pinpointing the
challenges
Of course, adopting the Renminbi is easier said than
done. It’s a task that requires the engagement and
cooperation of major stakeholders and counterparties
throughout each stage of the process. Furthermore, as
China’s administration continues to implement a stream
of reforms, corporates will need to overcome a number
of multifaceted regulatory and operational obstacles
that form the primary source of complexity.
For example, while the Renminbi is a single currency, FX controls and
regulations mean companies need to separate Renminbi funds into two
distinct onshore and offshore pools. In practical terms, this means treating
Renminbi as two currencies: CNY (Renminbi held onshore) and CNH
(Renminbi held offshore).
This may be further complicated, however, by the fact that CNH is only a
“convenience term”. CNY is the only official ISO code for the Renminbi and
does not in itself allow systems to differentiate and make payments across the
onshore and offshore pools. As the onshore rate is regulated and the offshore
rate is determined by the market, interest rates and exchange rates between
the two pools differ. Therefore, it is vital that corporates’ operating systems
can distinguish between the two.
For corporates looking to switch to the Renminbi, the scale of the challenge
should not be underestimated. Indeed, it is vital corporates gain a clear
overview of what is ultimately a tri-partite journey. This applies equally to
those corporates that have yet to commit to moving to the Renminbi. In this
respect, market dynamics may soon dictate their behaviour.
6
Deutsche Bank
The Renminbi: 2014 and beyond
Stage one is the need to secure buy-in from internal stakeholders and
counterparties. Ensuring that in-house operations and thinking are aligned
across departments is a vital consideration, and corporates should look to
their banks to provide education and consultative support.
Stage two is the need to overcome high-level hurdles with regards to evolving
rules and regulations. This, in reality, is a matter of communication and
understanding. Indeed, understanding is perhaps the most important element
throughout Renminbi adoption. Companies need to make every effort to stay
abreast of regulatory developments, again looking to their banks to help them
in this regard.
Finally, there is the more practical question of technology. Corporates will
need to upgrade their infrastructure, beginning with treasury and accounting
systems. This can be a complex undertaking, not least because there can be
no “one-size-fits-all” approach to making systems and procedures Renminbiready. In fact, the process will largely depend on individual companies’
existing set-ups. Deutsche Bank’s checklist (see next page) of the issues that
must be considered at a granular level can provide some guidance here.
For corporates
looking to
switch to the
Renminbi,
the scale of
the challenge
should not
be underestimated
7
Deutsche Bank
The Renminbi: 2014 and beyond
Are you ready to switch to
Renminbi payments?
Checklist of practical considerations for corporate treasurers
By Joe M.K. Ng, Asia Pacific Head of RMB Payments Product Management, Global Transaction
Banking at Deutsche Bank
1.
Identify the scope of internal changes
Should I re-negotiate sales terms or pricing with my trade counterparties?
Should I ask my suppliers for a dual currency quotation (RMB & USD) or a single currency quotation (RMB only)?
Which of my trade counterparties are more likely to accept re-denominating into RMB?
Will I gain any benefits at a cost level if I re-denominate in RMB?
2.
Internal awareness and education
When USD is entrenched as the standard payment currency, how can I introduce a new currency to my internal
stakeholders?
What are the key aspects about paying in RMB that my internal stakeholders need to know?
Who would I need to involve in a cross-departmental work stream on RMB?
Who can provide in-depth training / workshops for various stakeholders within my organisation?
Which rules and regulations related to the RMB do my stakeholders and I need to keep abreast of?
3.
Systems and operational procedures
Can my current EDI / ERP infrastructure support transactions in RMB?
How can I fulfil the physical third-party documentary requirements while using a paperless electronic platform?
How can I reconcile the CNAPS and SWIFT standards to make RMB payments?
i. Receiving Bank: SWIFT BIC code vs. CNAPS Bank Code
ii. Beneficiary Name: How can I input Chinese beneficiary names?
iii. Remittance Cost: BENEFICIARY / SHARED / OURS codes are not applicable on CNAPS
iv. Intermediary Bank: CNAPS does not recognise intermediary banks
v. Purpose of Payment: CNAPS has different CMTs for different purposes of payments, while this concept is not
applicable in the SWIFT environment
What kind of test payments do I need to make?
How can I achieve straight-through processing with RMB payments?
What are the key changes in operating procedures for RMB payments?
What are the key operational risk areas and how can I mitigate these risks?
Will my bank be able to support me in all the countries where I have RMB payment needs?
8
Deutsche Bank
The Renminbi: 2014 and beyond
4.
Receivables and payables management
How will the differences in permissible trade tenors between currencies affect my receivables and payables
management?
How can I manage the FX risk derived from the onshore and offshore exchange rate differentials for transactions with a
long trade tenor (especially for payables above 90 days)?
How will I be able to manage my inter-company receivables and payables if I am unable to net my RMB transactions?
5.
Accounting, financial reporting and cross-border reconciliation of RMB exposure
Since IFRS require the same internal RMB FX booking rate for both onshore and offshore subsidiaries, which booking
rate should use (e.g. CNY rate or CNH rate)?
If I reflect my onshore RMB position using offshore RMB exchange rates (CNH rate), will it be in line with the
requirements of China Corporate Accounting Standards?
What are the possible balance sheet implications when reflecting exposure in a CNY rate and in a CNH rate?
As most of the China Corporate Accounting Standards were created before the internationalisation of the RMB, how
should I reflect my RMB receivables / payables from offshore counterparties?
6.
Tax implications of RMB re-invoicing and redenomination
From a tax angle, which transactions should be re-invoiced as cross-border payments?
How do I handle the Export Tax Rebate for RMB transactions?
What are the possible VAT (Value Added Tax) implications for re-invoicing?
7.
Offshore Regional Treasury Centres (RTCs) for RMB payments
Where should I set up a RTC or re-invoicing centre?
How do I set up a RTC to facilitate RMB payments?
How will a RMB RTC affect the way my existing global treasury management is set up?
9
Deutsche Bank
The Renminbi: 2014 and beyond
The onshore and offshore
perspectives
Although bank support may still be required, successful
development of these key elements (internal buy-in,
understanding and technology) should help companies
manage the challenges and risks associated with
Renminbi.
For those onshore, convincing foreign suppliers to accept Renminbi could still
prove challenging despite the commercial advantages to be gained. This is for
three key reasons.
First, many chief financial officers (CFOs) have yet to determine precisely how
the Renminbi may be leveraged to the benefit of their companies, and are still
assessing the scope and cost of the adoption challenge. Managing the move
will largely depend on the CFO’s experience. For example, those that were
involved in the implementation of the euro will have a working knowledge
of what Renminbi adoption will involve, although the need to manage the
challenges posed by onshore and offshore Renminbi pools adds to the
complexity.
Second, the move to the Renminbi requires involvement at all levels within the
company. Payables and receivables management presents particular challenges,
in that the use of a new currency (for both invoicing and pricing) is not something
that can be implemented overnight. While many cross-border trade deals are
now settled in Renminbi, they remain largely priced and invoiced in US dollars.
If the Renminbi is to become an international currency, its adoption must gain
critical mass across the various ways companies utilise international currencies.
Finally, non-Chinese companies may be deterred by FX risks. The complexities
associated with convertibility issues, and limitations with respect to the deployment
and reinvestment of the Renminbi they receive, must also be addressed. Indeed,
corporate treasurers can no longer view the Renminbi as a “sure bet”. In March
2014, the People’s Bank of China (PBOC) announced that the USD/CNY Spot
FX intraday trading band would widen from 1% to 2% (or 4% in aggregate).
And in February 2014, the currency experienced its biggest three-day fall since
2011, dropping as much as 1.3% against the US dollar. With the introduction of
greater two-way volatility, companies must fully understand the implications of
paying, receiving and holding Renminbi on their balance sheets.
10
Corporate
treasurers
can no longer
view the
Renminbi as
a “sure bet”
Deutsche Bank
The Renminbi: 2014 and beyond
Anticipating developments
Of course, anticipating such developments and their
implications is easier said than done. Corporates will
need to consider not just the short and long-term
effects of two-way volatility (and how best to manage
the resulting FX risk) but also the Chinese central bank’s
broader aims and likelihood of intervention. That said,
two key trends are clear.
The trading band
may become as
wide as
+/-3%
First, widening the trading band has emerged as a preferred means for
gradually liberalising the exchange rate. The band was widened from +/-0.3%
to +/-0.5% in May 2007, then to +/-1% in April 2012, and most recently to
+/-2% in March 2014, so further developments should be expected and we
predict the band could potentially be widened to +/-3% in the next two years.
The implications of this policy move include near-term upside risk on USD/
RMB in the onshore and offshore spot and forwards markets, as well as
upside risk on Renminbi FX volatility. As market forces play an ever-greater
role in determining the Renminbi exchange rate, there are likely to be fewer
occurrences of intervention from the central bank, unless there is a significant
surge of speculative inflows or outflows.
The second trend is the rapid development of the offshore Renminbi crosscurrency swap (CCS) market, as corporates take positions on FX spots,
forwards and structured products to hedge FX risk in their cash flows. Daily
turnover has jumped from US$1.5-2 billion in January 2013 to US$4.5-5
billion today, and there is growing demand for corporate funding and liability
hedging (in accordance with greater offshore Renminbi, or CNH, bond
issuance). Furthermore, more real money and hedge fund investors are trading
on the offshore CCS curve for hedging or trading purposes. In fact, the curve
has now evolved into the most important offshore Renminbi benchmark
interest rate curve, with substantial growth potential.
11
Deutsche Bank
The Renminbi: 2014 and beyond
Understanding all these changes is undoubtedly a challenging task, and the
ability to successfully manage Renminbi funds requires further effort, from
assessing how the disproportionate flow of Renminbi funds will be managed,
to how the Renminbi funds received are best deployed. While FX swaps are
available, they may not be cost-effective. And other possibilities, such as using
Renminbi funds to invest in China, are not without their complications.
These are weighty issues, but foreign corporates that have yet to make the
switch should look beyond these factors. With the rise of the Renminbi and
importance of Chinese companies to global supply chains set to continue,
such foreign entities may run the risk of losing business as the ability to settle
in Renminbi becomes not only a competitive advantage but a minimum
requirement.
Deutsche Bank statistics show that Renminbi cross-border trade settlement
will increase by roughly 50% in 2014 to RMB6 trillion, or by approximately
20% of China’s global trade volume. While the challenges associated with
adopting the Renminbi are undeniable, such a figure cannot be ignored.
Onshore corporates and their foreign counterparties must therefore work
together to ensure the most appropriate Renminbi solutions are found for their
relationship-specific needs, enlisting bank expertise and operational support
wherever necessary.
12
50
%
Renminbi crossborder trade
settlement will
increase by
roughly 50%
in 2014 to
RMB6 trillion
Deutsche Bank
The Renminbi: 2014 and beyond
Optimising Renminbi funds
While the Renminbi’s evolution from a trade settlement
currency to a treasury management currency is
encouraging, it will not be a true global currency until
it is fully convertible. Indeed, the currency’s capital
controls have posed certain limitations on cross-border
Renminbi trading.
However, there is every indication that this relatively tight grip is loosening.
And as convertibility risk has been a concern for corporates, investors and
fund managers alike, positive developments in this respect can only be for
the greater good. In fact, further improvements are likely to act as a catalyst
for market participants to use the Renminbi not just for trade settlement but
also for investment, asset allocation and diversification. In time, usage of the
currency could even extend to include central bank reserve management.
Convertibility
risk has been
a concern for
corporates,
investors
and fund
managers
Regulatory reform and formal statements of intent are the market’s best way
of gauging China’s intentions with regard to moving towards full convertibility.
The country’s twelfth five-year plan (for 2011-2015) is perhaps the most
significant indicator, and makes it clear that efforts to improve convertibility
and reform exchange rate restrictions are set to continue.
The market has already seen notable progress in this respect. For example,
in July 2013, the PBOC simplified the documentary review of underlying
trade transactions and announced new measures to further promote offshore
activity, including the extension of the cross-border intercompany loan pilot
scheme. For MNCs looking to free up liquidity trapped in China, deregulation
can be a boon for working capital management, enabling them to utilise their
Renminbi in China with and across subsidiaries.
13
Deutsche Bank
The Renminbi: 2014 and beyond
Foreign Exchange
Such developments come against a broader backdrop
of growing market confidence and a deepening FX
market. In March 2014, London and Frankfurt were
added to the list of locations outside mainland China
where Renminbi transactions can be settled directly,
following on from the appointment of clearing banks
in Taiwan, Singapore and Malaysia.
The establishment of offshore clearing banks has not only facilitated Renminbi
cross-border trade settlement, but has also provided a channel for potential
Renminbi liquidity supply in the offshore market, and possibly a window for
cross-border flows to be channelled back onshore.
Deposit growth in these locations has also exceeded many expectations. Data
from Taiwan’s central bank shows that Renminbi deposits soared to RMB268
billion in April 20144, from RMB17.4 billion in August 2012. In Singapore, the
value of Renminbi deposits reached approximately RMB200 billion5 at the end of
2013, having stood at RMB60 billion6 just a year earlier. And Renminbi deposits
in London reached RMB14 billion7 at the end of 2013. By the end of 2014, the
total offshore Renminbi deposit base (including certificates of deposit) is likely to
hit RMB2.5 trillion8.
In April 2014,
Renminbi
deposits
soared to
RMB268
billion, from
RMB17.4
billion in
August 2012
Basic convertibility will likely see significant expansion for FX conversion quotas
as well as the Renminbi Qualified Foreign Institutional Investor (RQFII) and
Qualified Domestic Individual Investor (QDII) programmes. These combined
initiatives should further drive the two-way flow of Renminbi funds and
encourage greater market participation. That said, there is still some work to be
done, so 2020 may be a more realistic timeframe for the currency’s maturation to
full convertibility. Indeed, this date would correlate with China’s plans to develop
Shanghai into an international finance centre.
http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20140417000095&cid=1203
http://www.shanghaidaily.com/article/article_xinhua.aspx?id=206527
6
http://www.icbc.com.cn/icbc/%E6%B5%B7%E5%A4%96%E5%88%86%E8%A1%8C/%E5%B7%A5%E9%93%B6%E6%AC%A7%E6%B4%B2%E7%
BD%91%E7%AB%99/en/aboutus/news/ICBCs%20Inauguration%20of%20RMB%20Clearing%20Bank%20Services%20in%20Singapore.htm
7
Deutsche Bank Markets Research, CNH Market Monitor, 27th June 2014, page 4
8
Deutsche Bank Markets Research, CNH Market Monitor, 27th June 2014, page 1
4
5
14
Deutsche Bank
The Renminbi: 2014 and beyond
In the short-term, however, the impact of reforms will most likely remain
incremental in scope and significance. In practical terms, this means the
variances between the onshore and offshore markets are likely to remain for
some time to come. But once understood, these differences need not pose too
great a challenge.
In fact, when considered alongside the opening-up of channels for cross-border
Renminbi flows, which will facilitate corporate access to both markets, onshore/
offshore differences could potentially present opportunities with respect to
pricing and hedging that could work in a corporate’s favour. Certainly, the
existence of two Renminbi capital markets means there are respective pricing
gaps for FX, interest rates and derivatives.
That said, the difference between the two markets creates basis risk on
spots, forwards and interest rates, as well as cash bond financing. Although
2013 exhibited greater basis stability than was observed in 2010-2012,
this risk will remain until the liberalisation of the capital account leads the
onshore and offshore Renminbi to converge. In the meantime, managing the
differences between the onshore and offshore Renminbi depends on a detailed
understanding of the FX markets and the factors that drive them.
Onshore CNY
Offshore CNH
Non-deliverable
forwards (NDF)
The three-tier FX market
In fact, the FX market for Renminbi consists of three tiers: onshore CNY,
offshore CNH and non-deliverable forwards (NDF). An NDF is an outright
forward contract, through which counterparties settle the differences between
the contracted NDF price/rate and the prevailing spot price/rate on an agreed
notional amount. As the underlying currency is the same, these three markets
trade with strong correlation but track different spot levels, including the London
Interbank Offered Rate (LIBOR), the Hong Kong Interbank Offered Rate (HIBOR)
and the Shanghai Interbank Offered Rate (SHIBOR), which are in turn affected by
different funding activities. If companies fail to fully appreciate the various factors
that can drive basis risk, they will not only potentially miss market opportunities
but could also suffer as a result of incorrect hedging.
15
Deutsche Bank
The Renminbi: 2014 and beyond
Investment potential
Market participants should also look out for interest
rate deregulation and the further development of the
bond market. At present, interest rates in China are
regulated, which means there is a ceiling for deposits.
While this creates a gap in which banks can make
their margins, the spread will disappear as markets
deregulate and have the scope to move more freely.
The market has already seen some progress with respect to interest rate
deregulation. In July 2013, China eliminated the lower limit on lending rates,
thereby removing a floor set at 30% below the 6% benchmark; an important step
towards the liberalisation of deposit rates. If the deposit ceiling were to be raised,
it would boost financial institutions’ pricing capabilities and reduce funding costs
for corporates. Steps in this direction are already being taken, with June 2014
seeing the removal of the foreign-currency deposit rate ceiling for small accounts
within the China (Shanghai) Pilot Free Trade Zone, in an early-stage experiment
that has since been extended to the entirety of Shanghai9. While there is no
official guidance from China on the timing of a broader abolition of the deposit
rate ceiling and benchmark rates, market expectation is that it will take place
within the next two or three years.
Eventually, deposit rates are likely to be abolished entirely, with the establishment
of a prime rate as a market rate for lending. Looking at the evolution of other
markets such as Hong Kong and Singapore, the introduction of prime rates
marked a turning point in their development as financial centres. For China, the
establishment of a prime rate for lending would allow banks to more accurately
price risk, which would in turn provide flexibility, attract capital and drive
competition.
For corporates looking to raise funds in Renminbi, the dim sum bond market is
also important, and has come a long way since its inception. Initially it was mainly
perceived as a tool for investors looking to capture Renminbi appreciation, but it
is now priced according to risk rather than FX. Funds are more expensive than
they used to be, but this has not dampened the market’s relevance. Indeed, in
January of this year, Bank of China sold a record RMB2.5 billion bond to investors
(the biggest offshore Renminbi bond to date in London), providing evidence that
foreign investor appetite for Renminbi funds continues to grow.
http://www.bloomberg.com/news/2014-06-26/china-removes-cap-on-fx-deposit-rates-in-shanghai.html
9
16
China
eliminated
the lower
limit on
lending rates,
removing a
floor set at
30%
Deutsche Bank
The Renminbi: 2014 and beyond
In fact, 2014 may see the dim sum market matched by the panda bond market
(the market for domestic bonds for foreign entities), which will be a major
milestone in the evolution of China’s capital market. Substantial growth in the
panda bond market (as predicted in the next 12 months) would create a fullyfunctioning onshore debt capital market that would include international issuers,
and would encourage some of the world’s major corporations to tap the market.
Daimler, the German automotive company, has led the charge in this respect,
selling an RMB500 million10 panda bond in March 2014. Other MNCs may follow
as their China-focused strategies demand more Renminbi-denominated capital,
increasing the importance of building a local investor community.
For domestic banks and institutional investors, the development of the panda
bond market could help them with portfolio diversification; a goal currently
hampered by capital account quotas. Panda bonds could allow them to diversify
by enabling them to gain exposure to international borrowers via the onshore
market, although quality names will be important for the market from a credit risk
perspective.
Further developments can be seen in the use of the Renminbi for Foreign Direct
Investment (FDI). Prior to 2011, capital inflows were hindered by procedural
difficulties, such as the need to obtain approvals from China’s Ministry of
Commerce and the PBOC. But new rules announced in October 2011 introduced
greater levels of clarity and certainty, opening the door for the use of Renminbi for
capital infusion into China. China’s Ministry of Commerce further simplified the
rules in December 2013, removing the need for additional ministry approvals for
Renminbi-denominated FDI deals.
Of course, other limitations remain in place. For example, foreign entities
cannot currently use Renminbi funds to trade domestic securities or financial
derivatives, or make entrusted loans. However the December 2013 relaxation will
undoubtedly make it easier for foreign firms to use offshore-raised Renminbi to
invest in mainland China, a common use of dim sum bond proceeds.
Alongside greater liquidity, other key indicators of progress to look out for
include higher volumes of third-party transactions (i.e. Renminbi-denominated
transactions not involving a Chinese party) and greater circulation between the
onshore and offshore pools. While these factors are a work in progress, there can
be no doubting the overarching trend. Indeed, Renminbi trading more than tripled
between 2010 and 2013, to reach $120 billion a day. This momentum will only
increase as China takes steps to liberalise the capital account and to encourage
the flow of two-way Renminbi traffic.
http://www.ft.com/cms/s/0/9261b22c-ab65-11e3-8cae-00144feab7de.html#axzz35pgdIROp
10
17
Deutsche Bank
The Renminbi: 2014 and beyond
Breaking down
the barriers
In this respect, there are clear signs of progress, with
Shanghai providing a case in point. China plans to
develop Shanghai into an international finance centre
by 2020, and the journey has already begun with
the establishment of the China (Shanghai) Pilot Free
Trade Zone (FTZ). This is the first of its kind in China,
and is likely to be followed by further FTZs in Tianjin,
Chongqing, Xiamen, Zhoushan and Zhuhai11.
The Shanghai FTZ brings a number of benefits for corporates and non-bank
financial institutions alike, enabling them to more freely move cash on and
offshore. Recent developments within the FTZ extend the ways in which the
Renminbi can be used as a treasury management currency. For example, foreign
firms registered in the zone can now make use of Renminbi-denominated
cross-border borrowing and settlement (for investment items in the FTZ) and
“payments- and collections-on-behalf-of” (POBO/COBO) structures. Furthermore,
the administration has given the green light to two-way cross-border sweeping in
the zone, making it easier to conduct treasury tasks such as channelling liquidity
into mainland operations, or sweeping funds out of China to a regional treasury
centre, for example.
The Shanghai FTZ will continue to serve as a testing ground for new economic
reforms as well as for many of the Renminbi’s next steps, from further interest
rate deregulation and capital account convertibility to free Renminbi convertibility.
Indeed, such FTZs are likely to give rise to new pools of offshore Renminbi
liquidity and new Renminbi instruments. This will undoubtedly affect both the
onshore and offshore markets, though it is impossible to predict precisely how at
present.
Deutsche Bank Markets Research, Tracking China’s Reforms, 13th June 2014, page 5
11
18
Deutsche Bank
The Renminbi: 2014 and beyond
Making the right move
The currency’s potential (and the corresponding scope
for commercial opportunity) is clear. China is the
world’s largest goods trader, and history dictates that
the currencies of major players in global trade become
vital to the health of the global economy. Furthermore,
ongoing changes brought about by China’s economic
policy, which has actively driven the Renminbi’s
liberalisation from the outset, will cement the currency’s
position on the international stage.
The Renminbi
has already
staked its
claim as
a global
currency
With respect to trade finance and trade settlement, the Renminbi for all intents
and purposes has already staked its claim as a global currency. The continued
deconstruction of onshore/offshore barriers (via the Shanghai FTZ) heightens
the Renmimbi’s use and importance as a treasury management currency. And
ongoing financial reform and capital markets expansion (to cater to the needs
of both domestic and foreign borrowers and investors) mean the Renminbi’s
progress as an investment currency is picking up pace.
With regard to switching to the Renminbi, the question then is not “if” or even
“when”, but from a corporate’s perspective, “how”. In this respect education
is key, not only to keep up-to-date and fully understand the significance
of developments but also to subsequently convert these changes into
commercial opportunities.
Of course, commercial expansion into new markets, new product lines or
new currencies always carries an element of risk, but the complexity and
relative lack of clarity surrounding the Renminbi’s future means the risks may
be perceived to be higher. This means corporates must not lose sight of the
importance of migration management, and access to banks’ intellectual
support (in the form of consultation and guidance) may prove just as important
as operational support. In fact, at least during the early stages of the Renminbi
adoption process, intellectual support may be the most critical element.
19
Deutsche Bank
The Renminbi: 2014 and beyond
Ultimately, corporates looking to capitalise on the advantages of the Renminbi
must be aware that there can be no “one-size-fits-all” solution. The most
appropriate path to Renminbi adoption will depend on corporates’ individual
commercial strategies and optimal timelines for implementation. With this
in mind, there can be no substitute for banks’ analysis of client requirements
on an individual basis, and the subsequent design and implementation of
bespoke structures. Indeed, it is only through looking at the Renminbi’s
development from the perspective of trade entities worldwide, as well as that
of regulating bodies, that banks can not only help corporations convert the
Renminbi’s challenge into an opportunity, but also ensure they are best-placed
to seize this opportunity and realise its full potential.
20
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