RMB solutions for importers and exporters

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1 RMB solutions for importers and exporters Unravel the complexities of RMB

2 Mind the gap The potential Share of world trade vs payments The proof of the pudding Percentage of China s trade in RMB RMB 13th largest payment currency Significant room for growth based on China s share of world trade Source : Trade WTO, 3Q12, SWIFT, RMB Tracker January Source : PBOC, Estimates by HSBC

3 A recap: developments in RMB trade A global trade currency A global investment currency A global reserve currency HSBC forecast Trade settlement pilot launched Trade settlement pilot expanded Demise of MDE list (all Chinese importers/ exporters can now do RMB trade) One third of China trade to be RMB denominated Fully convertible? Source : HSBC 3

4 Why use RMB? Benefits to using RMB generally fall into three main categories Reduce foreign exchange risks and costs A benefit to the Chinese counterparty or subsidiary Can be passed on through better pricing or terms Strengthen relationship with counterparties Win market share Broaden network of buyers and suppliers Benefit from market disparities Potential access to cheaper offshore borrowing costs (market dependent) Differences in onshore / offshore foreign exchange rates (market dependent) 4

5 August 2012 HSBC China customer survey Confidence in renminbi Willing to offer discounts for renminbi? believe renminbi (%) will account for one-third of China s trade by 2015 Why use renminbi? (renminbi users) Why not use renminbi? (renminbi non-users) (%) (%) Base: 692 HSBC China corporate customers; Renminbi users and non-users; August

6 Exporting to China The customer is an exporter of electronics that receives LCs from its Chinese importers Before: HK Exporter (Offshore market) Negotiating/ Advising Bank 90 day USD usance LC Issuing Bank Importer (China) After: HK Exporter (Offshore market) Negotiating/ Advising Bank Issuing Bank Importer (China) 180 day RMB usance LC 6

7 Importing from China The customer is a garment supplier that manufacturers and sources in the Mainland RMB trade: End buyer (UK) Supplier (HK) Factory (Mainland) Factoring: Invoices End buyer (UK) (HK) RMB financing Supplier (HK) Factory (Mainland) 7

8 RMB inflows into China operations The customer is a privately-held multinational with retail stores in China that seeks RMB for capital expenditure to continue its network expansion. Issue: Pledge Loan 5.6-6% $ Limited fixed assets in China Chinese banks Higher borrowing cost Solution: Raise offshore Capital injection in RMB RMB syndicated loan (HK) % Dividend Repayment in RMB Onshore entities Benefits Cheaper financing offshore compared to onshore Eliminate the need for FX conversion onshore by injecting in RMB Operational efficiency achieved for onshore fund utilisation 8

9 Regulatory update* on RMB and foreign currency payments Simplified RMB cross-border settlement (Jun 12) Simplified foreign currency payments (Aug 12) Documents required Statement of collection (payment) Only one of: customs declaration form, contract, or invoice Geographic coverage Selected provinces/cities To be expanded Nationwide Benefits Minimal supporting documents required Improved operational efficiency Simplified documentation preparation Improved operational standardisation and efficiency, and facilitated centralisation Other noteworthy points Eligibility requirements varies from city to city, but generally requires a stable banking relationship, stable counterparties and volume, and not on watch list Classification of enterprises into type A / B / C according to their compliance record * Regulatory update is about China s regulations. 9

10 Holding RMB Liquidity in Turkey The customer is Turkey based corporate entity with business partners in China that seek RMB for various payments. Issue: FX at the time of remittance Payment $ Holds fund Earns Libor based interest rate Turkey Business Partners in Hong Kong/China Solution: FX when rate is favorable Cross border payment in RMB Holds funds in RMB Earns relatively higher interest rate Turkey Business Partners in Hong Kong/China Benefits FX done taking advantage of FX rates Relatively Higher Investment Yields on surplus cash. 10

11 RMB Capabilities HSBC Globally OFFSHORE (CNH) ONSHORE (CNY) Account Services Payments Services Investing Liquidity Account Services Payments Services Investing Liquidity Current Account Currency Exchange Time Deposit Current Account Currency Exchange Time Deposit Time Deposit Account Remittance Interbank transfers Time Deposit Account Remittance Interbank transfers Europe UK, Germany, France, Turkey, Italy, Switzerland, South Africa MENA UAE, Qatar, Bahrain, Lebanon, Jordan, Kuwait Asia-Pacific Almost all Canada Bermuda RMB Capabilities in Over 50 global markets including Europe Countries Note: Services offering varies in different countries 11

12 What s next: RMB cross border sweeping? Foreign currency cross border sweeping pilot was rolled out in Beijing and Shanghai at the end of 2012 Onshore Offshore Mainland China RMB Area Turkey Capped by overseas lending quota London Domestic foreign currency master account (DFMA) International foreign currency master account (IFMA) Hong Kong Capped by foreign debt quota 12

13 History of US dollar renminbi USD-CNY spot rate Pegged to USD FX reform July 2005 Purchasing goods from China in USD does not always fully hedge the TRY cost Importers have occasionally found that they have to pay a higher charge due to renminbi appreciation The opening of the CNH market now allows corporates to full hedge the risk 7.50 Crawling peg: 21% appreciation 7.00 Financial crisis FX reform July 2010: CNH market creation Source: HSBC 13

14 Frequently asked questions by European corporates How can I easily hedge my renminbi exposure? Who else is doing this? How should I approach my Chinese counterparts to discuss renminbi opportunities? 14

15 Case study: Turkish Brown Good Manufacturer Client profile Turkish brown good company TV panels manufactured in China Had been hit with unexpected USD price rises due to RMB appreciation Wanted a full hedge with flexibility in terms of size of commitment Hedging strategy Full protection against USD falling versus the renminbi Obligation limited to 50% of the protected notional Protection at prevailing spot rate (6.17) at inception Zero premium Reference information Spot USDCNH year forward USDCNH Term sheets with full scenario analysis of derivatives products will be provided to clients prior to trading 15

16 USD-CNH spot versus 1-year forward USD/CNH Spot USD/CNH 1Y Forward 6.10 May-2011 Aug-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012 Oct-2012 Jan-2013 Apr year forward is over 1.2% higher than spot; a benefit not secured by companies who still purchase Chinese goods in USD 16

17 Case study: Turkish Iron & Steel Producer Client profile Turkish Iron & Steel Producer Growing raw material imports from China Exporter in China put a clause in its documentation which allows 3% price increase in USD terms if USDRMB (onshore) falls below 6.00 Wanted to hedge this exposure as the importer already has very tight margins so did not want to purchase option Hedging strategy Client switched to paying in CNH allowing hedge for zero premium Collar protecting 6.10 with 6.31 cap Reference information Spot USDCNH year forward USDCNH Term sheets with full scenario analysis of derivatives products will be provided to clients prior to trading 17

18 Disclaimer This document is issued by HSBC Bank PLC which is a member of HSBC Group of companies(hsbc Group). HSBC Bank PLC has based this document on information obtained from sources it believes to be reliable but which have not been independently verified. The issuance of and details contained in this document, which is not for public circulation, does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever. This document is intended to be distributed in its entirety. All kinds of transactions shall be subject to business conduct of HSBC Bank PLC and compliance to local legislation. Reproduction of this document, in whole or in part, or disclosure of any of its contents, without prior consent of HSBC Bank PLC, is prohibited. HSBC Bank PLC is under no obligation to keep current the information in this document. HSBC Bank PLC is not responsible for providing you with legal, tax or other specialist advice and you should make your own arrangements in respect of this accordingly. 18

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