Case Study: Laird Treasurer on Renminbi Liberalisation
“The renminbi (RMB), to use its official name, is here to stay and is now in the
top five of the world currency league
,” said Harwood, group treasurer at UK manufacturer Laird, Lucie Harwood, at the recent conference.
Last November the RMB overtook the Canadian dollar (CAD) and the Australian dollar (AUD), to become the world’s fifth most-used payment currency and the second most-used in trade financing.
The establishment of various offshore RMB clearing centres around the globe has helped the currency’s rise, alongside other liberalisation moves, such as the recent decision to allow cross-border RMB cash pooling via the Shanghai free trade zone (SFTZ) in China. Harwood identified this as “the next thing we’d like to do” in Laird’s on-going RMB treasury project.
Laird – now an electronics and connectivity equipment manufacturer but once a heavy-duty engineer producing ships and trains – began onshore cash pooling in China in 2008 to optimise liquidity, cut borrowings and obtain other treasury benefits. “We also opened a shared service centre (SSC) in Shenzhen in 2012 to help centralise cash management and get payment processing efficiency,” said Harwood.
The corporate had US$0.5bn in revenue when it started its RMB treasury project last decade, but first entered China in 1996. It now employs 6,000 people at various manufacturing sites and is growing rapidly.
According to Harwood 33% of total group costs are now in RMB and Laird actively encourages customers to pay in the Chinese currency. “Not so long ago that would have seemed unusual, but not anymore,” she said. “Invoicing is probably still only at the 12% mark [versus 33% for its cost base] but RMB invoicing is definitely on the up.”
Trapped Cash, or Excess Liquidity?
The corporate has six entities inside China and now transacts inter-company loans, which helps better serve its manufacturing presence in the country. “I can manage the currency more easily now too offshore,” said Harwood, referring to the new international RMB clearing centres that opened last year in eight locations such as London, Frankfurt and Singapore. “I don’t have to rely so much on spot trading, non-deliverable forwards (NDFs) or other such mechanisms anymore because I can do it from London now.”
Addressing the issue of trapped cash, Harwood told her audience “our Chinese partners tell us off for using the term trapped cash, encouraging us to call it ‘excess liquidity’ instead.
“Traditionally we used to get ‘excess liquidity’ out of China via dividends and suchlike, but with cross-border RMB cash pooling, via the SFTZ, we could put funds in and do cash out transactions much more easily.”
That is why it is on Laird’s ‘to do’ list, alongside setting up a payments-on-behalf-of (POBO) approach and other moves designed to take advantage of the increasing liberalisation of the RMB.
As a final piece of advice to her audience, Harwood cautioned other treasurers wishing to undertake a similar project that relationships are incredibly important in China and can help you navigate some of its still complicated regulation and domestic laws.
“A local Chinese bank – even a branch office – might help you understand Chinese regulation better than an international bank,” she advised.