For companies doing business with China, the benefits of using the renminbi (RMB) make a strong case for learning how to. China has been loosening controls on the RMB to establish it as a global trade currency and eventually a reserve currency.
Photo: Charles Bowman
But as the RMB begins to flow more freely – more than 10% of China’s trade is now settled in RMB — international companies are still sizing it up, assessing how it fits into their operations, the risks and rewards. So, following are 10 reasons for switching to the RMB, plus some strategies for foreign companies.
- Restrictions and paperwork are falling away. The days of having all transactions “chopped” and pre-approved are fading. Policy shifts include moving from an approval-based system to post-transaction monitoring. This has eliminated much of the paperwork involved in doing business with a mainland China company, thereby speeding up the transaction cycle. Today, most foreign companies can trade goods and services in RMB with a Chinese company without pre-approvals.
- 2. Your Chinese partner is asking. The decision to switch to the RMB usually comes down to a commercial consideration: Your Chinese buyer or supplier is asking you to do business in the RMB because it is more convenient for them.
- Greater purchasing power Chinese companies are known to offer discounts to foreign buyers who pay or invoice in RMB, because it means lower transaction costs for them.
- Competitive advantage. If your company is willing to do business in the RMB, and a competitor isn’t, you gain an advantage with Chinese buyers and suppliers who prefer to do business in the national currency.
- Broader market access Switching to the RMB gives foreign companies access to a wider range of Chinese buyers and suppliers.
- 6. The technology is catching up. Electronic banking and cash management systems are becoming better established in China. The China National Advanced Payment System (CNAPS), which makes it easier for banks to clear cross-border RMB trade transactions, now has 70,000 domestic members.
- Lower FX costs For foreign companies that buy and sell goods in China, using the RMB provides a natural FX hedge. It can also help reduce FX transaction costs. A number of offshore products and services are available to allow forward RMB exposure to be hedged through options and forwards.
- Growing international market for the RMB A plethora of offshore RMB financial products and services are becoming available to companies from commercial banks and financial institutions, from money market products to bonds, term deposits, index products and FX services. This is helping to promote wider adoption of the currency.
- Asset diversification It is anybody’s guess whether the RMB will be an appreciating asset, and there is still a way to go before it is fully free to fly, but a strong and still-growing Chinese economy present the RMB as an asset diversification consideration. As well, the growing number of offshore RMB bonds issued by organizations such as Caterpillar, McDonalds and HSBC Bank, offer opportunities for investors looking at increased exposure to Asia.
- A better business partner When doing business in China, being prepared to deal in the local currency demonstrates a commitment to the country and to your Chinese partners. It’s the corporate equivalent of being polite and respecting your host.
Strategies for trapped cash
Once they have crossed the RMB psychological barrier, the next consideration for international companies is how to deal with “trapped cash” in China. Here again, the Chinese government is relaxing the rules and expanding the options for foreign companies. Following are four strategies for repatriating your Chinese profits:
- Cross-border inter-company lending. The offshore division must be a subsidiary of the Chinese parent, but the rules around this have been simplified. There will be tax implications, but a simple cost comparison will determine if this works to the company’s advantage.
- Funding your China expansion. One smart strategy for utilizing your excess RMB is to fund your China expansion. For example, lending to your Chinese distributors can help them bulk up their network and thus move more of your product.
- Dividend repatriation. There is paperwork involved, and possibly a significant tax burden, but this is another relatively easy way to repatriate excess cash from China.
Repayment of shareholder loans A bit more complicated than the strategies above, this method involves registering the shareholder loan agreement with SAFE (State Administration of Foreign Exchange) and obtaining a tax clearance certificate for the loan interest. Approval is required by SAFE for repayment of loan principle and interest, and the repayments must abide by the loan agreement terms.