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Better Education Needed on Chinese Regulatory Change

With an increasing number of multinational corporates looking to use renminbi in their day-to-day business, banks need to step up their efforts in providing information and education to this sector regarding the latest rule changes being implemented by the Chinese regulators.

This was the advice of the sole corporate on the recent “Corporates’ Use of RMB in Businesses” panel at the London Renminbi Markets Conference, organised by AFME, ASIFMA and GFMA’s Global FX division.

“The banks aren’t particularly good at educating corporates about what they can and can’t do,” said Ian Hambleton, group managing director at Studio Output. “If banks could make that message more visible, that would be helpful because otherwise it makes it very difficult for a corporate to be competitive in China.”

Studio Output is a medium-sized creative agency business with four offices, one of them in Beijing. As part of the service industry, it quite often has a mixture of work being done locally in China, which could be paid in RMB, and abroad, which could be paid in RMB, GBP or USD.

Hambleton said that the biggest challenge the company faced was staying ahead of the curve in terms of education and knowledge about the ongoing changes, not just in terms of tax implications but the practical application of invoicing in RMB and onshore and offshore liquidity management.

“It isn’t just about tax, but how we get paid and how we pay our suppliers,” he explained. “But in saying that of course we don’t want to expose ourselves to a massive tax bill at the end of a contract because we haven’t coordinated things properly.”

Hambleton said that there is also a lack of clarity as to what can be done in the new offshore RMB hubs. Recently the company set up an RMB account in the UK with a bank that said it could perform the necessary RMB trading. “But it couldn’t, so we had to set up accounts with two other banks,” he explained. 

Also speaking on the panel, Huabin Wang, deputy general manager, Bank of China London Branch, stressed that the education challenge was more acute for small and medium-sized enterprises (SMEs) because most lack a large treasury function. “They don’t have traders to chase RMB valuation every day, so almost everything they do depends on the bankers to deliver,” he said.

“Consequently, SMEs still find it very difficult – they want to use RMB as an invoicing currency to have more buying power with their partners in China, but need help to stay abreast of the regulatory developments. The market needs to continually put in the effort, especially to facilitate companies’ use of RMB and allow them to benefit from that process.”

Alex Axentiev, head of FX options, west, Standard Chartered Bank, speaks with corporates mainly about FX hedging. He observed that USD/CNH was the number three global currency pair this year, behind EUR/USD and USD/JPY. “This is good because liquidity is already there,” he said. “The FX market has adjusted quite quickly in terms of what can be done to hedge RMB risk.”

But there are a number of challenges remaining. “For one, the onshore and offshore markets are not yet fully connected, not fully fungible,” said Axentiev. “Plus the onshore market remains out of reach for multinational corporations (MNCs) unless they have an onshore entity.”

He pointed out that most of the RMB hedging performed by MNCs this year was actually to protect against the depreciation of the currency. “During the February/March period, RMB hedging notably accelerated. People were buying EUR/CNH calls to protect against a crisis in China.”

In the future, once onshore corporates start to invoice in RMB, the FX risk will move from onshore to offshore. “European corporates will have actual risk in RMB and they will begin to hedge much more,” Axentiev said. “We believe that next year we will see a large take-off in RMB hedging by corporates.” 

Evan Goldstein, managing director, global head of RMB solutions, Deutsche Bank, returned to the question of liquidity management, both onshore and offshore. “This is a dilemma for the more successful MNCs who have large businesses in China and either want to move liquidity offshore to help fund their growing operations in other markets, or feel that their onshore business, for example their treasury management function, hasn’t been set up to deal with that amount of risk. So they need to find a way to best pull RMB liquidity into their offshore or regional treasury centre.

“It is easy to have conversations about these topics, but every business needs to consider its own strategy and determine what its ultimate aim is because there are so many different ways in which you can approach this question,” he advised.

Goldstein outlined the landmark announcement on 6 November that made cross-border sweeping a nationwide scheme, no longer limited to free trade zones (FTZs). “MNCs don’t necessarily have to have their header account and main entity in the Shanghai FTZ – it can be anywhere in China,” he explained. 

“This is a telling announcement on two fronts. The first is that the cycle time between testing and ‘yi bu bu’ – the step-by-step approach to reforms – and when it actually goes live is shorter than anticipated. So a corporate might want to go ahead with the SFTZ, if that fits its existing strategy, or it might want to wait and see because things are happening quite fast.

“The second is that there is a dual system in operation, which means that this national expansion doesn’t supersede the SFTZ in terms of cross-border sweeping,” said Goldstein. “Corporates need to understand the announcement and then the details because the nationwide scheme has minimum onshore annual turnover criteria that must be met, and the offshore entity has to be participating in the cross-border scheme for a certain minimum amount of time. So the devil is in the details.”

In terms of cash pooling, Wang said that while many MNCs already have a Mainland China cash pool, the next challenge is to establish global RMB cash pooling, which is highly dependent on RMB liquidity in offshore markets.

“In the past, large MNCs that generate hefty profits in China just repatriated the money by changing RMB into other currencies,” he explained. “But now they can choose to repatriate RMB outside the country and keep a proportion of RMB in the offshore market, essentially not for cash pooling but to build up an offshore liquidity pool.”

Goldstein believes that the development of investment products outside of China will be key to the RMB’s further internationalisation. “Corporate treasurers and financial institutions need primary and secondary markets to provide an incentive to hold RMB liquidity, otherwise it is going to ultimately wind up back in China. That isn’t helping China from a policy ambitions perspective, and it definitely doesn’t help corporates to hold something that they have a difficult time investing offshore.”

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