As China's global trading strategy - and in particular its Belt and Road Initiative (BRI) - opens it up to more cross-border business, the renminbi (RMB) becomes increasingly attractive as an operational currency. How are corporates preparing?
By 2020, China estimates half of all its foreign trade to be settled in RMB. With the currency's progress now intertwined with China's ambitious Belt and Road Initiative (BRI), His Excellency, Liu Xiaoming, Chinese Ambassador to the UK, speaking at the recent HSBC China RMB Forum, pronounced BRI as “an opportunity for the world”.
The level of trade potential derived from BRI will act as an economic stimulus across the region and, as far as China is concerned, an internationalised RMB will facilitate freer flows of incoming and outgoing investment, lower trade costs and financing activity for all stakeholders.
The recent inclusion of RMB in the IMF's Special Drawing Rights (SDR) basket of currencies has given RMB the credibility it needs to find its place on the world stage. Inclusion was described as “a big event with a profound impact” by Madame Jin Mei, Chief Representative for Europe, People's Bank of China (PBoC), also speaking at the event. She added that it is “good for China and for the whole world” that RMB is now set on a course to “help build a stronger international monetary system and promote growth, stability and resilience”.
The “long journey” of RMB towards eventual convertibility has seen some complexities arise, noted Gareth Lloyd-Williams, Head of Corporate Sales, UK, Global Markets, HSBC. In particular, he said it is very important to understand the unique make up of RMB as an onshore currency (CNY), which can only be traded in mainland China and has its rate controlled by PBoC, and as an offshore currency (CNH), which is for external trade only and which effectively floats.
Although under IMF guidance the spread between CNY and CNH has reduced in recent times, Lloyd-Williams urges companies operating in China to “stay nimble” to take advantage of any differences, especially around hedging. Regulations do allow banks to hedge customers' underlying positions depending on which rate (CNY or CNH) is most suitable, but whilst the Chinese authorities are keen to support trade, he warns that they will not tolerate speculation.
Maria Elkin, Group Treasurer, Lloyd's Register Group, presides over a growing Chinese business and is now focusing long-term on RMB as a “more strategic currency”. However, she still faces liquidity and repatriation issues with flows translating back to sterling. The company does not yet hedge but is now invoicing in RMB and uses onshore pooling allied with a lending profile that enables it to release cash whilst waiting for repatriation approvals.
Bennett Birgbauer, Group Treasurer, Jaguar Land Rover (JLR), indicated China now accounts for about 20 per cent of the sales of the Group. It has moved over time to RMB operations, switching to RMB billing in 2014. It now gets paid in CNH and executes CNH FX transactions in London. Regulatory reforms have “supported normal corporate treasury activities, similar to how we operate in other currencies”, he noted.
With about 80 per cent of its sales outside the UK, JLR has significant currency exposures which it hedges up to five years out in descending percentages. JLR presently hedges CNH up to about three years out in the London market and expects liquidity to continue to improve for longer dated hedges.
Alex Fiott, Assistant Treasurer, AstraZeneca, has seen huge growth for his business in the last decade in China. Helped by the firm's high-tech status and associated accelerated product approval by local agencies, it is now AstraZeneca's third largest market behind the US and Europe, delivering revenues of around USD$2.5bn.
Since 2008 it has been invoicing in RMB, mostly intercompany, and now hedges with spots and forwards using the onshore rate. Although Fiott says he has access to the financial products he needs in China, the advent of more relaxed cross-border pooling would allow China to “plug into our global operations”.
In the longer term, the inclusion of RMB in the IMF's SDR will “be a boost to market confidence”, said Vina Cheung, Global Head of RMB Internationalisation, HSBC. As central banks gradually increase their RMB pool, it will mean RMB-based financial products will become more accessible.
This in turn means overseas entities operating in China will be able to integrate those operations into the rest of the business. Indeed, this is already part of engineering firm, Arup Group's business plan.
“Increasingly we're working with Chinese companies, both in China and out of China where RMB is a natural currency for our clients to work in,” explained Arup Chairman, Gregory Hodkinson. “Now our ability to be flexibly paid in that currency, and to sweep that currency into our global basket, gives us complete flexibility to work with Chinese clients all over the world.”