Canada’s RMB Hub Benefits for Corporations
Why is the RMB Hub important to Canadian business?
Canada competes with other commodity producing countries for a share of China’s imports. If Australia is selling Grade A wheat and Canada is selling Grade A wheat, but the Australians will transact in RMB, and the Canadians will not, it is unlikely that the Chinese importer will use the Canadian supplier.
According to Swift, on average 31% of payments in Asia Pacific with China and Hong Kong are already done in RMB, up from 7% in April 2012. Not only does this demonstrate how quickly the RMB has been accepted as a payment method in Asia Pacific , it shows how vital it is for Canadian businesses to adopt RMB into their payment workflow to remain competitive.
Benefits common to all corporations
- There may be an improvement in funding terms.
- It allows for shorter trade settlement than settling in USD. PBOC 168 is a circular issued in July 2013 that enables corporates to take onshore RMB out of China in intercompany loans and allows for settlement in RMB to occur before providing supporting trade documents – therefore shortening days sales are outstanding.
- There is the potential to negotiate better price/payment terms due to more transparent pricing from Chinese suppliers.
- It broadens the pool of eligible trading partners with whom to do business.
- Corporations can enjoy competitive edge over competitors in trade businesses with thin margins.
- There is potential to grow market share and increase profit margins.
Benefits for Small and Medium-Sized Enterprises (“SMEs”)
- There is the potential for faster business expansion due to first mover advantages.
- Exporters may develop new customers who only deal in RMB.
- Importers can have payment terms extended to 210 days.
- It is easier for Chinese banks to issue a letter of credit in RMB.
- Credit support from EDC may be available.
On June 1, 2014 China’s State Administration of Foreign Exchange (“SAFE”) issued an edict and operational guidelines on the Regulation on Foreign Exchange Administration of Cross-border Security. In effect, the new rules relax most of the existing restrictions on cross-border security guarantees. The advantage for foreign companies with Chinese subsidiaries is that those units can borrow locally using the credit rating of the offshore units, which in virtually all cases is higher.
Impact of RMB on Multinational Corporations
Multinationals’ currency strategies are evolving
Almost two-thirds (62%) of companies currently using RMB in cross-border transactions expect the volume of transactions to more than double in five years.
As the RMB grows in importance, many multinationals are changing their currency strategy. Some of the advantages of using CNH include:
- Concentrates risk/treasury management at the head office rather than with local entities.
- Demonstrates commitment to China and its strategic importance.
- Diversifies assets and protects against depreciation in one currency.
- Allows for cash management advantages via inter-company loans or payments to subsidiaries and suppliers in RMB.
- Provides more flexibility in settling salaries and benefits in China.
- Increases investment and debt options.
- Provides ability to use CNH to fund growth plans within China.
- Allows for a corporation that has a subsidiary in China to trade in generally lower onshore rates.
Shanghai Free Trade Zone
In April 2015, the government expanded the pilot to three more zones, Guangdong (including Hong Kong and Macau in an effort to accelerate their integration into the mainland), Tianjin, and Fujian. These zones only apply to companies that have an entity and a physical presence in China that is established and located in one of these zones.
What is it?
- An area in Shanghai designated by the government as a pilot scheme to accelerate the transition towards a freely convertible currency.
- The Shanghai free trade zone permits RMB cross-border sweeping and pooling, RMB cross-border payment and netting, and borrowing from the offshore RMB market.
- Companies have been able to pool their onshore and offshore RMB to provide intercompany lending to and from China, allowing available excess RMB funds to be put to work.
What are the benefits?
- The Shanghai free trade zone permits RMB convertibility and unrestricted foreign currency exchange.
- Foreign invested enterprises may open RMB special deposit accounts to hold RMB obtained from FX settlements, which may be used to make payments.
- Reduces manual processes and paper work for treasurers.
- There are also other benefits for varied industries, for example, commodities entering the free trade zone are not subject to duty and customs clearance as they otherwise would be.