To Renminbi or Not to Renminbi – What should Procurement Organizations do?
Categories: Trade Credit Commentary | Tags: AdvantageBC, offshore RMB, renminbi invoicing, RMB settlement
Are your Chinese suppliers able to reduce prices if you buy in RMB instead of USD or Euros?
Following the November 2014 announcement by China’s central bank naming Canada as a Renminbi Settlement Hub, work is currently in progress to put the necessary infrastructure and processes in place to allow for RMB-denominated transactions to be settled and cleared between North American and China using a settlement hub in Vancouver, B.C.
I recently attended a workshop provided by AdvantageBC on Canada’s role as an offshore RMB settlement Hub.
The Rise of the RMB: An Overview
The RMB is now the fastest growing settlement currency, rising to the #5 spot based on SWIFT December 2014 data. It has overtaken the Aussie Dollar, Canadian Dollar and even the Swiss Franc.
The challenge is that the RMB is not a freely tradable currency, at least not yet nor in the foreseeable future (although some pundits believe the Chinese Central Bank have a five year plan). So if you want to trade in Chinese currency, you need to use Offshore Centers designated by the Chinese Central bank. Canada was the tenth RMB Settlement Hub to be designated by the Peoples Bank of China. The following week, the Industrial Commercial Bank of China was designated as the clearing bank for the Vancouver Hub.
How do you make the change to using RMB?What do you do when the Chinese company you are doing business with asks that settlement be in RMB instead of US or Canadian dollars? Certainly the Chinese supplier should be able to save money in currency exchange costs as well as reduced hedging costs and reduced risks. A recent HSBC survey showed that Chinese companies would be prepared to offer as much as a 5% price benefit.
This is driven totally by three facts:
- The Chinese seller does not have to manage FX risk,
- The Chinese seller does not have to go through China’s State Administration for Foreign Exchange (SAFE) to exchange RMB for USD (a huge headache) and
- The Chinese seller can borrow in RMB on those receivables at better rates than USD receivables.
How does the RMB settlement process work?If you are based in the U.S. and are using RMB, chances are you are going through the Hong Kong settlement hub. ICBC will hold RMB trading accounts in your name (via your own bank, so your bank will have a Correspondent bank relationship with ICBC). In addition, ICBC will offer asset management and other services.
As I listened to the presentation, my thoughts centered on how you make corporates aware and educated on the mechanics of making this happen in their own organization. Given there are multiple internal departments, each with different agendas, KPIs, success measures, that is not easy. Think about it for a minute. A corporation runs a complex web of systems - ERP, purchasing, treasury, etc. so it's no simple exercise and requires more than just a belief in a survey that says you can get 5% reductions from your suppliers. You also need to know what you are going to do with all that RMB if you sell in RMB. You now take the currency risk. Or conversely, fund an account with RMB to support millions of purchases.
This is a very interesting area, and I personally believe it is worth the effort in your own organization to start getting smart about this. My advice – engage your banker and ask the right questions internally as well. Also talk to your Chinese suppliers – is this something they would get excited about.