RMB trade slowdown prompts treasury sophistication

The latest Swift RMB Tracker showed that the renminbi was the sixth most-used currency for international payments in the month of December 2016. 

The result marks a decline for the RMB, which ranked fifth in the same month the previous year. Its share of international payments has fallen to 1.68%.

The value of the payments being made in the currency also declined, falling by about 15% between November and December 2016. By comparison, the overall value of payments in all currencies increased 0.67% in the same period. Over the whole of 2016, the value of payments made in RMB fell by 29.5%.

Corporate treasurers are looking for a currency that will not cause them unnecessary risk. 

“In general, corporate treasurers are looking for a more stable currency to settle their trade so as to minimize foreign-exchange risk and hedge cost,” says Lim Him Chuan, global head of product management in global transaction services at DBS. 

“In addition, they will be looking at opportunities to deploy their excess working capital to generate higher returns.  

“Offshore corporates, specifically those that are subsidiaries of mainland corporates, could also tap into their parent companies’ source of RMB funding.”

The Chinese regulators have stepped up the rules around offshoring the currency, requiring, from January this year, that in Shanghai, for every Rmb100 taken overseas, the inflow needed to be matched. Previously, the requirement was Rmb100 for every Rmb160 offshored.

It is even stricter in Beijing, requiring Rmb100 to be imported for every Rmb80 that is remitted.

The move can be seen as an attempt to stabilize the currency, without stifling its plans for further internationalization. The concern is that should high sums of the RMB be remitted overseas, it will result in speculation on the currency.

Nathan Chow, senior economist at DBS, says the currency is working through a difficult period as the government figures out what exactly it wants to achieve from its internationalization attempts.

“RMB internationalization is entering a stage with asymmetric development,” he says. “In particular, regulators will continue to open up the onshore capital market to attract capital inflow, but simultaneously step up efforts to prevent capital from leaving the country.

“Without a doubt, that will slow the growth of offshore activities. It is however understandable, as RMB internationalization is one of Beijing’s main objectives.

However, the tougher conditions offer opportunities to those banks that can support clients’ use of the currency. 

Vina Cheung, global head of RMB internationalization at HSBC, says: “There are clients looking into strategic positioning. For these clients, it is about how banks help them with liquidity challenges from capital controls.

“There is always a lot of understanding from the local banks, as there are often questions being asked on the reason and process for the remittance, which can make payments slower.”

And Cheung adds that even in the new environment there are still good deals to be done for international clients.

“How currency fluctuations impact clients depends on their exposures," she says. "RMB against the dollar is looking to be at 7.20 by the end of the year. The concern of the government is more around how it compares to the basket of currencies than an individual currency.

“Even against the US dollar we have recently made a good case for an American firm that is looking to explore RMB settlement with its Chinese counterpart.”

Where clients are facing difficulty, Cheung says banks need to be on hand to offer assistance, especially where the flow of funds might have stalled. 

“When the funds can’t arrive on time, what is the solution for the offshore clients in Hong Kong or London?" she says. "We can step in to look into lending to help them to cover their short-term liquidity needs. If there are standby letters of credit we might be able to structure a loan based around that.”

HSBC has stepped up its offerings for the clients in the offshore markets. Corporates are looking towards hedging products in the face of FX risk. And banks are able to offer them a range of products and derivatives services, which are similar to those already in use for other currencies in their portfolios.

With so much change happening, Cheung says treasurers need to plan their China strategy years in advance to get the best from their bank. 

“When corporates have a long-term strategy and business plan involving China, it needs to be specific," she says. "When we are talking to them it is not about pushing the RMB and saying it is the best solution – we need to understand the client’s needs and how those are determined by their strategy.”

The RMB is now being looked at as more than a currency for cross-border trade. 

Says Chow at DBS: “Looking forward, more CNH will be going abroad as a financing and investment currency, instead of a pure trade settlement currency like it used to be in the early stage. China’s Belt and Road initiative is set to play a major role in driving this growth.”

He says the next important step is for the currency to be allowed to find its own footing if it wants to be seen as one of the world’s top currencies, rather than exotic emerging currency.

“It could be a more two-way currency with less intervention, where it is allowed to depreciate against a strong dollar, while also appreciate against a weak dollar," says Chow.

“This is a bit different from the strategy in early 2016, when it was falling against a strong dollar and steady against a weak dollar. A higher degree of flexibility can help the currency find its equilibrium faster.”