China’s central bank has shown support towards the gradual relaxation of the nation’s capital account. The most recent is the removal of restrictions imposed on cross-border renminbi trade settlement. The People’s Bank of China (PBoC) announced on Tuesday that all importers and exporters in China will be able to settle cross-border trade in the Chinese currency.
While importers have always been allowed to settle in renminbi, exporters were previously restricted to those on the mainland designated enterprise (MDE) list. This list was restricted to 67,000 companies. There are now no barriers to companies.
“The MDE list is history and the new process takes place,” says Michael Vrontamitis, head of product management East Asia for transaction banking at Standard Chartered. “What is good about this rule is the simplification of the documentation process. Clients will be more willing to adopt the renminbi.”
This new development is also meant to spur competition in the global trade arena, given the fact all Chinese exporters are now able to participate. As a result, this will lead to a reduction in costs.
“Getting rid of the MDE list means you can access more buyers and suppliers in the mainland, which increases the number of people that will be able to buy your product and vice versa, hence reducing costs,” adds Vrontamitis.
According to a research report released by Western Union in March, foreign companies that are willing to re-denominate their trade transactions with their Chinese counterparts into renminbi are able to benefit from potential dollar cost savings of 2-3%.
While the rate of renminbi adoption by foreign counterparties still remains a question, market participants are confident that cross-border renminbi settlement will continue to rise this year.
Standard Chartered predicts that global trade settled in the Chinese currency will reach 20% by 2015 from last year’s 10%. Meanwhile, ANZ forecasts a 5-10% growth in 2012 from last year’s total cross-border trade settlement volume of Rmb2 trillion ($314 billion).
“The problem is the penetration rate of renminbi, but it seems to be getting more popular compared to last year,” says Raymond Yeung, senior economist at ANZ. “The total volume of international trade shouldn’t be smaller than the level last year. We could be talking about a scale of Rmb2-3 trillion this year.”
The use of the Chinese currency to settle international trade has grown rapidly since a trial programme was launched in 2009, allowing a few hundred companies in some select geographical areas to do so.
The programme has since been expanded nationwide, and the renminbi has become the third most-used currency in the world to finance exports and imports, behind the US dollar and the euro, though it remains a small proportion of the total.
‘Blacklisted’ enterprises
While there has been a relaxation in the overall restrictions imposed on exporters, some are still “blacklisted”. Around 9,500 Chinese exporters have been placed on a “special supervision” list.
The PBoC statement did not specify what kinds of infractions the companies on the list might have committed, but many Chinese companies have used the trade settlement mechanism to exploit differences between interest rates and the renminbi’s exchange rate between domestic and foreign markets.
“These are firms being blacklisted,” says Yeung. “With this list being determined, the local authorities can now proceed with the liberalization outlined in March.”
In March, six ministries jointly issued a statement allowing all exporters to conduct renminbi cross-border trade settlement for goods. However, this was not officially enforced until Tuesday.
The “blacklisted” entities are not allowed to retain their renminbi holding offshore and will be audited on an annual basis. Banks will also need to adopt more appropriate measures – supported by a payment information system – when conducting transactions with these firms.
“[Exporters on the supervision list] will require additional documentation over and above what is currently required,” says Vrontamitis.
He adds that the increased risk settlement banks have to bear will depend on the company’s relationship with their bankers and the “overall return [banks] get when dealing with their clients”.