China’s Currency Conversion

Now that multinationals can trade with Chinese customers and suppliers in renminbi, CFOs have a new option to weigh.

Three years ago, China’s policy of hampering the movement of its currency across national borders and in currency markets shielded its banks and investors from the worldwide financial crisis. But as its rapid-growth, globalized economy threatens to burst at the seams, China’s isolationist policy for the renminbi (or yuan) now threatens its future.

So China has made a big first step, allowing banks and companies to settle payments with cross-border trading partners in renminbi (RMB). Simply, a U.S. multinational can now pay a Chinese supplier in RMB, and a qualified Chinese buyer can pay a U.S. supplier in RMB.

In reality, there are now two forms of RMB that trade at slightly different exchange rates. Foreign companies can accumulate the more freely tradable version of the Chinese currency — informally called offshore RMB — in bank accounts newly available in Hong Kong and elsewhere. Using those accounts, they can pay Chinese suppliers (and trading partners in some other Asian countries) and accept payments from their Chinese customers. And foreign-exchange conversion of RMB — the “offshore” variety — is now permitted, with limits.

All of this is good news for U.S. companies, some of which have had to settle trades with Chinese suppliers in U.S. dollars, while others have struggled to benefit from the excess RMB they have stockpiled on the mainland.

On the other side of the transactions, Chinese suppliers are welcoming the ability to deal in RMB. “By settling in RMB, multinational corporations can improve the terms of trade,” says Philippe Jaccard, head of global liquidity and investments in Asia-Pacific for Citi. “Chinese suppliers and distributors will no longer need to deal with the foreign-exchange risk.”

And for U.S. multinationals selling in China, if their customers have the necessary clearance to get their onshore RMB payments converted to offshore RMB, U.S. treasurers will have a lot more flexibility with the cash they generate.

Of course, companies need to carefully weigh the decision to deal in RMB. “Treasurers need to keep in mind that there is still higher risk of convertibility and transferability than with the U.S. dollar,” says Jaccard.

The gradual appreciation of the renminbi has multinationals stockpiling cash in the currency.

Cross-border trade settlement in RMB reached $78 billion in 2010 — about the size of the U.S. wedding industry — and has already surpassed that in 2011, according to the People’s Bank of China. In the first quarter, say analysts, about 7% of China’s imports and exports were settled in RMB, versus 0.5% a year ago. That could climb to 40% — or $2 trillion — in three to five years, say some bank economists.

The tools to deal in renminbi are developing commensurately. Deutsche Bank, for example, is opening RMB accounts in Hong Kong at a rate of 20 per week. While some of that represents investors trying to cash in on the currency’s appreciation versus the U.S. dollar, others are using the accounts for trade. Payments company Travelex introduced business transfers in renminbi in early July. The service uses Travelex’s proprietary clearing network instead of banks’ systems.

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