China’s Currency Conversion

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

The benefits of paying Chinese suppliers in RMB are hard to ignore, says Gareth Heald, Travelex’s finance director for North America. “When invoices are in U.S. dollars, the Chinese supplier factors RMB appreciation into the price, so they lack transparency,” Heald says. By paying in RMB, a large corporation can control its exposure to RMB-to-U.S.-dollar appreciation. At the same time, the receiving company gets the payment faster, which could allow it to release the goods sooner, Heald adds.

So far, it’s multinationals with lots of experience in China that are adopting RMB payments, says Feng Xue, chair of the Asia/China practice at Katten Muchin Rosenman; other businesses remain cautious.

Multinational buyers need to make sure that the Chinese trading partner is signed up with the pilot program, of course. About 70,000 Chinese firms have already done so. “You can’t just remit to any beneficiary,” Heald cautions.

Into the Pool

For multinationals garnering profits in mainland China (think McDonald’s, Yum Brands, and General Electric), the liberalization of the renminbi provides possible solutions to a long-standing problem: what to do with the local currency that they generate. Due to government regulations, “it’s been a real headache to get money out of China,” says Xue, especially capital that doesn’t come directly from aftertax profit.

Yet in truth, few U.S. businesses have the motivation to convert their RMB profit into U.S. dollars and send it back to headquarters. The U.S. tax code discourages profit repatriation, for one, and “the markets are making it good to hold RMB,” says Lewis Sun, head of sales for global payments and cash management at HSBC Bank (China) Co. Ltd. According to some analysts, the highly controlled RMB is still as much as 40% undervalued relative to the U.S. dollar. “At this moment, appreciation is a very tangible benefit,” Sun says.

But the offshore renminbi opens the door to other choices. Under the new rules, for example, a company manufacturing within China that gets paid in offshore RMB could pay for goods coming from other Asian countries with that cash, says Citi’s Jaccard. A multinational company with a sophisticated treasury operation could also use a base of RMB deposits to set up a multicurrency notional pooling, says Jaccard. (A notional pooling is a treasury tool that combines the balances of cross-border accounts to offset interest as well as assets and liabilities.)

“In effect, [the pooling] can recycle excess RMB into a U.S.-dollar pool to fund the rest of the company’s operations without the balance-sheet cost,” says Jaccard. The only restriction: the offshore RMB has to have accumulated from trade transactions. With some banks, offshore RMB deposits could also be used as collateral to borrow money in other currencies or to get cheaper financing from the deposit bank.

Of course, multinationals striving to expand their exposure to China and keep up with a heated economy will use RMB earnings to fund growth there. “General Motors has set an ambitious sales target of 5 million cars in China by the year 2015, demanding huge capital spending,” points out Clark Li, a partner in global investment research at asset-management firm Balentine. Using tax rebates and tax exemptions, moreover, the Chinese government strongly encourages multinationals to deploy their RMB capital inside China.

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