The RMB’s Moving Forward; What’s Stopping You?

By Geri Westphal

The international renminbi is surging, making it easier for funds to flow in and out of the country. But companies are still concerned about the future.  

Having recently completed three of five stops of a five-city tour, The NeuGroup and Standard Chartered Bank’s recent roundtable series, “The Path to Bolder RMB Implementation,” provided treasurers and senior finance professionals with the opportunity to discuss shared experiences in dealing with the internationalization of the Renminbi (RMB).

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. They are also looking to take advantage of the current regulatory changes, while 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.

In results from the pre-roundtable survey, it is clear that the notion of being “too early” is prominent in the minds of many US treasurers. The survey revealed that 61 percent of respondents do not use offshore RMB and approximately 50 percent of roundtable participants are just beginning to explore the opportunities related to cross-border pooling in China and the cost-benefit of implementing an RMB strategy.

“If we get greater clarity on regulations, we would likely make this a much higher priority,” said one roundtable participant, proving the point that many corporate finance departments are unaware of the opportunities available to them in this exciting new market.

Caroline Owen, Regional Head of RMB Solutions, Americas, at Standard Chartered, detailed some of the growth, noting that the Peoples Bank of China (PBOC) has signed RMB bilateral currency swap agreements with 29 central banks totaling more than CNY 3.1 trillion.

And according to SWIFT, the RMB as a percent of world payment currencies has increased more than five times since 2011 and nearly one-third of the world’s financial institutions are using RMB for payments. 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 the high level of interest around the globe to support the evolution of the RMB.

Despite attendee caution, many were encouraged in what Ms. Owen had to say. “China has picked up the pace of deregulation,” she said. “They want to become less dependent on foreign currency particularly USD and Euro, so they are making it easier for all market participants to use RMB in day-to-day cross-border business.”

Here are the most common concerns as expressed by Roundtable attendees:

Rules only apply to the Shanghai Free Trade Zone. Although the Shanghai Free Trade Zone (SHFTZ) was established for the purpose of acting as a testing ground for the Chinese government to pilot reform measures, the intent was to replicate these rules for the rest of the country in a controlled manner. As of March of this year the SHFTZ was expanded to include the city’s financial district (Lujiazui) along with other neighboring areas, which had enlarged the zone to four times the current size.

China’s State Council has approved the launch of three additional free trade zones in Fujian, Guangdong, and Tianjin. These new regions bring expanded viability to the RMB with each zone offering a unique key feature. Fujian is the first province to engage in economic exchange with Taiwan and is seen as a test bed for policies to improve cross-strait investments and logistics systems.

Guangdong is the economic hub of southern China with one of the highest levels of provincial GDP. This region is expected to focus on customs clearance and the finance industry. Tianjin is a major port city located near Beijing and their focus is expected to be high-end manufacturing, shipping, financial leasing, and further integration of the Bohai Bay area.

With the expansion of the existing SHFTZ and the addition of the three new FTZs, it is expected that the speed of RMB reform will increase as globalization continues. If you are doing business in any one of the new FTZs, you should look for more reform that may make doing business in China easier than ever before.

Concern the Chinese will change the rules down the line. As mentioned above, the Chinese government is trying to make things easier. But it’s still a concern.

“It comes down to whether or not you believe the new leadership’s anti-corruption drive is aimed at implementing more reform for consumer-driven economy or whether it is simply a way to consolidate more power at the top,” said David Mann, Managing Director, Head, Macro Research, Asia for Standard Chartered Bank. 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 above 7 percent for 2015 and 2016.

“It isn’t likely that we will return to the double digit numbers, but the dollar delta is still expected to continue even if at a lower percentage overall,” he said, which means the economics favor continued reform. Based on the expansion of FTZs and the uptick in global market acceptance, it seems that the internationalization of the RMB is an irreversible trend. According to Ms. Owen, “That train has already left the station. Now it’s about rolling out the reforms in a responsible manner.”

It’s not too early to develop your RMB strategy. There’s now no doubt the renminbi is on a tear. It’s been growing in global importance for some time but has really taken off since the introduction of the SFTZ a year and a half ago. Based on the rapid pace of change and the anticipated continuation of regulatory reform in China, US MNCs are encouraged to take the time now to lay out their RMB strategies and begin to take advantage of recent changes.

There are basic strategies that can be implemented now to enhance the use of trapped cash in China, add a competitive edge to your sales cycle by pricing in RMB, and improve margins by redenominating trade to RMB. These important strategies will lay a strong foundation for future improvements as regulations continue to change.