Making China’s New Regulatory Stance on RMB Work for You

With China easing rules on RMB use, now is the time to implement strategies for RMB internationalization. 

Looking to provide treasurers and senior finance professionals with the opportunity to discuss shared experiences in dealing with the internationalization of the RMB, The NeuGroup and Standard Chartered partnered together to conduct a series of RMB roundtables. Chicago was the first stop of a five-city tour for “The Path to Bolder RMB Implementation” series. The meeting was interactive and full of great information regarding the RMB’s rise and increased use. You can check out the other stops in New York and Menlo Park here and here.

The general theme of the Chicago roundtable was one of cautious optimism. Many of the roundtable attendees’ companies have been in China for 20-plus years and are looking for ways to establish structures that will improve the flow of funds in and out of China. These treasurers want to take advantage of the current regulatory changes while at the same time remaining cautious in their approach to not being “too early” and having to undo or redo these structures to comply with any future regulatory changes.

As we took time to introduce ourselves in our opening round-robin session, each member described their most urgent issue in China, with most agreeing it was the build-up of cash and the inability to use it effectively based on current restrictions.

SAFE interactions

In our session titled “RMB Liquidity Management,” one of our showcase clients walked us through a very thorough presentation of their recent interactions with SAFE, China’s State Administration Of Foreign Exchange, and the kickoff of a multi-phase project to improve liquidity management in the country. The company has been in China for 40 years with long-standing business relationships established with customers and regulators. In 2012, SAFE invited them to participate in the pilot program designed to improve the way multinationals do business in China. With approval from SAFE, the team started executing the various offerings under the pilot program.

The company’s implementation project included an entire review of their existing banking structure which became complex over the years with its footprint expansion in China. It determined the need to streamline its treasury services as well as the payment platform in China to further improve efficiency. The implementation phase included two banks as core providers, thereby significantly reducing the number of bank accounts within the country. Key treasury operations, such as cash management, foreign exchange, funding, and payments were centralized, which provided greater oversight and control.

As with any cross-functional project of this size and scope, the company found that communication was key. The project team held regular communications sessions with key stakeholders and business partners where project details and milestones were shared and issues discussed openly. Close collaboration with SAFE and the company’s lead banks was maintained to ensure the project’s timely implementation. These open communications also helped to keep key business participants engaged and focused on the common goal.

Some of the key benefits for the company included a more streamlined banking structure, greater visibility of cash balances, cross-border lending capabilities, and enhanced governance and controls.

Consumers Needed

As part of our next session on market and economic updates, David Mann, Managing Director, Head, Macro Research, Asia for Standard Chartered Bank summed it up this way: “It comes down to whether or not you believe the new leadership’s anti-corruption drive is aimed at implementing more reform for a consumer-driven economy or whether it is simply a way to consolidate more power at the top.” Although statistics show that the Chinese economy has slowed and the labor market shows signs of softening, the growth projections are still expected to be around 7 percent for 2015 and 2016. “It isn’t likely that we return to the double digit numbers, but the dollar delta is still expected to continue even if at a lower percentage overall,” he said.

David made the observation that many western MNCs are finding that the China “red carpet” is gone, thus indicating China’s desire to encourage more competition in all industries. The group agreed that they are maintaining a certain level of caution and have so far taken a “wait and see” approach to the new changes. Some believe that Chinese regulators are welcoming the outside world into China only to learn their ways and that they will continue to subsidize Chinese companies to unfairly take business away from the newcomers. “They are giving these freedoms to you to learn from you and then dominate you,” said one attendee. Revealing similar distrust, other roundtable participants felt that the level of hospitality had changed over time and that the Chinese government was a little less thrilled with certain sectors coming into China than they had been previously.

Despite these cautions, attendees were encouraged by what Caroline Owen, Regional Head of RMB Solutions, Americas for Standard Chartered Bank, had to say. “China has picked up the pace of deregulation. They want to become less dependent on foreign currency, particularly USD and Euro. It’s all about cash flow and trade. They want to pay for goods with RMB and push the currency out,” she said. This is evidenced by the RMB’s rapid movement from the number 13 SWIFT payment currency in 2013 to its current spot of number 5 as of November 2014. There are currently 10 currencies with direct trading relationships with the RMB and 15 clearing banks in offshore markets, with another 10 more offshore clearing banks expected this year. This rapid growth shows how much countries want to support this evolution.

According to SWIFT, the RMB as a percentage of world payment currencies has increased more than seven times since 2011. RMB trade settlements are now much easier to process since corporates no longer have to provide a large amount of supporting documentation for RMB settlement for cross-border transactions. The new process is a simpler one-page, double-sided form that is filed with the bank. You must check the box that you have satisfied your tax obligations and local banks may make you provide tax documentation, but it is certainly easier than it has ever been to process RMB trade settlements.

Companies can fund ongoing RMB payables to Chinese suppliers by leveraging the cross border lending programs including the PBOC One-Way RMB Cross Border Lending, PBOC Two-Way RMB Cross-Border Lending in the Shanghai Free Trade Zone (SFTZ), and PBOC Pan-China Two-Way RMB Cross-Border Lending (new). Attendees discussed the specifics of each program in detail and were encouraged to learn how these structures can be a way for net borrowers in China to fund working capital needs without impacting foreign debt quotas or debt capitalization rules.

At the time of the meeting, the Chinese New Year was just a week away and Caroline Owen from Standard Chartered expected more regulatory announcements that would further boost the RMB internationalization, including a significant expansion of the existing SFTZ to include three new zones. The SFTZ will be expanded by nearly four times its current size and is expected to include Pudong, where many of the financial institutions are currently located. The expectation is that the regulators would duplicate the rules from the current SFTZ to these three new zones to allow for greater RMB acceptance in the global markets.

No Longer a One-Way Street

During the session, “Managing Your RMB Exposures: To Hedge or Not to Hedge?” Brian Jennings, Executive Director, Financial Market Sales at Standard Chartered, described the growing trends in the onshore and offshore markets whereby the RMB is no longer viewed as a one-way appreciation bet, and the continued convergence of the CNY NDF (onshore) and CNH (offshore) rate curves may eventually make the CNY market obsolete. Based on his presentation, many market participants have migrated from CNY NDF to CNH deliverables for hedging purposes to eliminate basis risk and transact in what is now a more liquid market.

The CNH bond market is the world’s fastest growing bond market with over CNH 1 trillion of issuance since market inception, based on Standard Chartered statistics. According to other statistics, the 2014 “dim sum” market reached record territory with 587 billion RMB of issuances, which puts the RMB bonds on pace for another record year in 2015. New issuances cover the spectrum of credit quality and as of February 2015 ninety-five percent of the 2015 YTD issuances were rated single A or better, with the majority falling in the single A category. Tenor is most often one to two years.

As we wrapped up our discussions, many attendees admitted they felt a new sense of optimism that now may be the time to review the opportunities that exist as a result of the new regulations and continued internationalization of the RMB. Many felt that there were a handful of basic strategies that could be implemented now that would add value to their global treasury structures without adding additional risk. Most were excited to get back to the office and begin discussions on how best to move forward in China.

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