The Renminbi: Why it’s Having Trouble Catching on
How many corporates care that the Chinese renminbi (RMB or CNY) is now the eighth most-used currency globally for payments (by volume, according to SWIFT)? Chances are, if your company still has a US dollar-centric mentality, that first sentence means very little to you. You may even pass over any article that contains the relatively-unknown currency name ‘renminbi’. In some ways, this is understandable; and this is coming from someone who has spent a large swath of the past few years devising strategies for companies to take advantage of the new opportunities that involve using RMB. It boils down to a single issue: right now, it’s too complicated to use the RMB. There are too many rules.
Is it impressive that a currency went from being the 35th most-used to the eighth most-used globally between 2009 and today? Absolutely. If, however, one takes into account the fact that international companies weren’t able to use RMB for payments before 2009, then all of a sudden that statistic starts to lose its impact. It all goes back to data, or perhaps more accurately, how that data is interpreted.
The RMB is now a top 10 payments currency, but it had to leapfrog currencies such as the Polish zloty (PLN) and the Danish kroner (DKK) to get there. While both the PLN (14th) and the DKK (16th) are top 20 currencies, they do not represent economies that are anywhere near as large or influential as China. One of the reasons why Denmark has a currency considered to be a mid-major is because many Danish exporters invoice in DKK. In China, the majority of invoices are still in US dollars (USD0. That is the primary reason why many businesses do not care that the RMB is now the eighth most-used currency in the world for payments. Why move from the USD if it seems to be working?
In 2009 China started its ‘internationalisation experiment’ where, for the first time in decades, the Chinese RMB could be used for trade settlement. The first few years included a complicated pilot programme where certain businesses were qualified as ‘mainland designated enterprises’ (MDEs) and were able to use RMB for trade purposes. It was not a simple or transparent process. A few years on, the situation has improved; in the past, a Chinese company had to determine if they were legally allowed to settle trade in the RMB as a designated MDE. That is no longer the case as of early 2012. Now,
if you are a licensed importer or exporter in China, you can settle trade in the RMB
(service providers can also settle in the RMB if conducting cross border business).
Now, part of that last sentence was italicised for a reason. Just because it is the law in China, does not mean that people know about it.
China is famous for having both national and provincial laws. The most recent legal change to the
is a perfect example; it was passed at the national level but still needs to be adopted by the Chinese provinces and municipalities. The law concerning the RMB (
Yinfa 2012 Number 23
) was done at a national level and does not require provincial approval. It is the law, but again, few exporters seem to grasp what they can and cannot do.
Shortly after the law was passed in 2012, countless cases emerged where mainland banks rejected payments sent to settle trade. Why? They thought it was illegal. One of the most significant changes to Chinese banking rules was passed and wire rooms in countless banks across China had no idea. In some instances, it took sending a copy of the law and resending the payment for the bank to believe that a foreign financial service provider knew the law before a state-owned Chinese bank.
Today, a similar situation has emerged with Shanghai’s Free Trade Zone (FTZ). Does that ring a bell? Well, that’s because while announced in September 2013, the rules applicable to the zone have yet to be published. There are many rumours surrounding what will be allowed within the FTZ, including the possible elimination of many currency restrictions. Rumours, however, do not provide the certainty businesses need in order to operate.
A recent article in a Beijing newspaper recounted the woes that Chinese exporters are experiencing because of the strong RMB. This type of article isn’t new; more and more of these stories have appeared as the RMB continues to hit new highs against the USD. In long-winded fashion, it discussed how exporters are seeing their profit margins eroded and even gave an example of an exporter who broke even on a large shipment without making any profit. The last story was by an exporter with four-month payment terms who billed in the USD and watched helplessly as the RMB appreciated and profits suffered. Stories like this demonstrate both a lack of awareness and a missed opportunity.
The missed opportunity, however, is one that can be used to a corporate’s advantage if they buy from China. Chinese exporters
need to invoice in the USD. They’ve been able to invoice in the RMB for almost two full years. Invoicing in the RMB is not difficult for them and it certainly isn’t difficult for anyone in the West to pay them in their currency. The People’s Bank of China (PBOC), China’s central bank, even made an announcement in 2012 saying that importers could save 2-3% if invoices were negotiated in RMB.
Corporates should be letting their partners know that they can pay in the RMB and see if they can get not only a price discount, but also more beneficial payment terms. If an exporter is increasing prices, that’s a great time to talk about the RMB. Chances are you will know more than them.
The process of doing business with China isn’t perfect, but it’s much easier than it used to be. Germany’s Siemens AG just announced that the RMB is now considered a ‘regular’ currency in its payments and invoicing. If a company the size of Siemens is looking at China’s currency on the same status as the USD or euro, the rest of the business world needs to listen. If Chinese companies aren’t aware of the legal changes, maybe it’s your job to tell them. Your bottom line depends on it.