Chapter 4 Integrating cash and trade
their partners in China, as well as potentially
mitigating their own ‘natural’ currency risk.
Companies may further benefit from adding
an extra currency to their portfolio, one that
has so far demonstrated greater resilience
than the existing major trading currencies:
while the US dollar and the euro both showed
weakness during the financial crisis, the RMB
remained relatively stable.
With liquidity supported by strong
offshore CNH issuance and increasingly
large bilateral swap agreements – such
as the RMB 200 billion deal between the
People’s Bank of China and the Reserve
Bank of Australia in 2012 – the Chinese
‘experiment’ has been an almost unqualified
success. Further expansion therefore looks
certain, with Hong Kong’s role as an offshore
centre being complemented by offshore
hubs such as London and Singapore that
will help to take internationalisation further
into Asia and the west. The growth of the
RMB as an international currency will also
be accompanied by the expansion of RMB-
denominated instruments, including hedging
tools that will enable companies to better
manage their RMB liquidity.Navigating the RMB landscape
So what has this meant for treasurers? While
the adoption of the RMB as a settlement
currency has deepened corporates’ access
to China’s rapidly expanding economy and
simplified some of the processes, there are
complexities too. In common with Asia in
general, Chinese traders still rely heavily
on letters of credit, and these are checked
very strictly by Chinese banks: even minor
discrepancies can result in delayed payment.
Local knowledge is therefore vital to
supplement global expertise. While regulations
have loosened, they still require careful
consideration, both individually and in terms
of the whole regulatory framework, so that
the best strategy can be chosen not only for
making and receiving payments but for the
repatriation of profits and repayment of loans.
For treasurers not based in the region, banks
that have already guided their clients on such
matters can offer valuable expertise.
The offshore CNH market can provideexciting opportunities for non-Chinese
companies looking to make investments into
China. By raising funds in the so-called ‘dim
sum market’, they can use the proceeds to
build their enterprise in China, then use the
income from this new venture to pay back
the coupon – all without the need to trade
or exchange a single euro or US dollar.
Arbitrage opportunities are also very much to
the fore, as discrepancies between onshore
and offshore pricing can provide opportunities
to maximise revenue, particularly for
commodity companies that have structured
their operations optimally.
Despite some unique challenges and
opportunities, however, the treasurer will
generally find the processes familiar as they
attempt to mitigate FX risk, proactively support
their supply chain, and manage their cash
and liquidity. In each of these areas banks
are working hard, both locally and globally,
to make these processes easier and more
efficient, while also acting in an advisory
role to ensure that a viable, well-structured
RMB strategy is implemented. This can offer
support across a number of areas, such as
unlocking and redeploying working capital
to maximise returns, reducing external
financing needs, understanding and managing
operational and credit risk and improving the
visibility of cash positions.Looking ahead
There is little doubt that the creation of an
offshore CNH market has been a success
and has facilitated much greater use of
RMB among western corporates and
investors. Although the utilisation of CNY
for international trade remains restricted
and regulated, there are signs that it is
beginning to fulfil its potential to become
Asia’s regional currency.
Yet opinions are divided about just how
far, or how fast, internationalisation will go,
and the Chinese proverb, ‘cross the river
by feeling the stones’, may be the best way
to sum up China’s cautious and methodical
attitude. There can be little doubt, though,
that with China set to become the world’s
largest economy during this decade, its
currency still has some catching up to do.