Gateway to China: How using the renminbi could transform your China business

Gateway to China: How using the renminbi could transform your China business

The rise of renminbi Over the past three decades, China s GDP has grown at an average rate of 10% a year moving the country from the seventh to the second largest economy in the world 1. China s rapid ascent as an economic power makes it too big for international companies to ignore. As a key hub for manufacturing, China has long played a critical role in many global supply chains but today its huge and increasingly affluent population also makes it a compelling destination for exporters. China s integration into the global economy is also moving beyond trade and into financial services, as is evidenced by a growing range of renminbi-denominated investments available outside of China. For all these reasons, China has become more important than ever to many companies growth plans. Leading players are not only highly active in China, but looking for ways to accelerate their China strategy. This is where a well-planned renminbi strategy could be decisive. Opportunity awaits Global use of the renminbi is growing rapidly, and the currency is already one of the top ten traded currencies in the world 2. However, there is still huge scope for growth. Currently, only 22% of companies operating in China are using renminbi to settle trade, according to HSBC s recent renminbi survey 3. This means that many businesses are potentially missing out on the substantial benefits that the renminbi could provide. China s total trade settled in renminbi is expected to rise to 30% in 2015, up from 10.5% in 2013 4 The renminbi opportunity is set to open up further in the coming years. China is gradually relaxing controls on the use of its currency across borders and deepening renminbi markets outside of China. The aim is to transform renminbi into a major global currency. Already, major offshore renminbi markets have developed, particularly in Hong Kong, London, Singapore and Taiwan, and the currency is on course to be traded as freely as other global currencies within the next few years. What renminbi liberalisation means for your business The renminbi s liberalisation is important for all companies that conduct business with China.New opportunities are available now and continue to unfold for companies based within and outside of China: According to HSBC s renminbi survey polling 1,300 companies from all corners of the globe some 22% are already benefiting from using renminbi for trade settlement, with one third (32%) expecting to start using renminbi in the future. Six in every ten international companies plan to expand their cross-border trade and business in China in the year ahead 5. Your renminbi guide This guide outlines the key developments and issues that companies need to understand to start planning the next stage of their renminbi strategy. Navigating renminbi markets Key business benefits Renminbi case studies Accelerate your renminbi strategy HSBC s renminbi experience 1 World GDP Ranking 2014, Knoema, April 2014. 2 Bank for International Settlements (BIS), June 2014. 3 HSBC, RMB International Study 2014 (June 2014). 4 How can we make best use of our new RMB account?, HSBC article, November 8, 2013. 5 HSBC, RMB International Study 2014 (June 2014). 2

Navigating renminbi markets Renminbi is one currency, but restrictions on the transfer of the currency to and from China have created two renminbi markets: an onshore market in mainland China, and an offshore market outside mainland China. The two markets have different interest rates, exchange rates and regulations. The onshore market for renminbi, the CNY market, is used by domestic Chinese companies, Chinese individuals and foreign companies with a presence in China. Until 2010, CNY was the only market for renminbi and was highly regulated. Interest rates and exchange rates in the onshore market are managed by Chinese authorities. The offshore market, or CNH, market was launched in Hong Kong in 2010 6. This allowed renminbi accounts to be held offshore, creating the opportunity for foreign businesses to trade the currency outside of China. Since then CNH has grown rapidly as restrictions have been lifted 7. Singapore, London and Taiwan have also established CNH markets. Foreign companies are now able to issue renminbi-denominated Dim Sum bonds outside China. Interest rates and exchange rates are determined by supply and demand. Initially the two markets were separated, with controls preventing currency flowing between them. But restrictions on capital flows between the two have been eased, and over the next few years we will likely see the convergence of these markets. Three common designations for the currency: RMB: Renminbi ( People s Currency ) is a general term for the currency of mainland China while the unit of currency is the Yuan (in the same way that sterling is a general term referring to the unit of currency, British pounds). CNH: Used to signify the offshore market for renminbi, e.g. the CNH market. CNY: Used to signify the onshore market for renminbi, e.g. the CNY market. CNY is also the ISO currency code for renminbi whether it s traded in the onshore or offshore market. As a result, renminbi-denominated payments in most systems should be quoted as CNY. 6 Development in offshore RMB, Bloomberg, 2013 7 Monthly statistical bulletin, Hong Kong Monetary Authority, June 2014 Renminbi internationalisation milestones July 2009: Renminbi cross-border trade settlement pilot launch in select cities in China July 2010: Launch of offshore renminbi product platform August 2011: Renminbi cross-border trade settlement expanded throughout China* December 2011: Launch of RQFII (Renminbi Qualified Foreign Institutional Investor) initiative March 2012: All companies in China can settle cross-border trade in renminbi** December 2012: Renminbi clearing bank appointed in Taiwan February 2013: Renminbi clearing bank appointed in Singapore February 2014: Singapore and London agree co-operation to boost renminbi trading March 2014: Renminbi trading and clearing agreed for Frankfurt June 2014: Renminbi trading and clearing agreed for London By approximately 2017: Likelihood of full renminbi convertibility 8 Key business benefits Using the renminbi can offer a range of advantages to companies doing business in or with China: Cut costs Gain market share Simplify processes Improve liquidity and cash management Negotiate better trading prices and terms Reduce FX exposure or risk Support long-term strategic partnerships with China 8 China liberalising, renminbi rising, HSBC article, June 2014 * Cross-border RMB trade settlement was initially only offered in pilot sites/cities, it was then expanded to all cities in China in 8/2011. ** Even though geographical coverage was expanded nationwide, not all companies were qualified to conduct cross-border RMB settlement at first. Only companies on the MDE (Mainland Designated Entity) list could transact, this list was abolished in March 2012 when a watchlist was formed instead. Then, all companies in all cities NOT on the watchlist became eligible to transact. 3

Streamline cross-border trade with China Using renminbi can bring benefits when importing or exporting to and from China Most countries in the world can now settle trade with China in renminbi. If you import or export to and from China, it is worth exploring whether you could benefit from switching your trade currency to renminbi. For example, if you buy from China, your supplier s own costs are most likely in renminbi. They may offer you better prices or terms in exchange for the benefits of settling in their own currency. You could ask your supplier to give you two quotes, one in your usual currency and one in renminbi. Conversely, if you sell into China, accepting renminbi payments could be a smart move. It may help you win new customers or negotiate better terms. 60% of Chinese businesses would offer a price incentive to deal in renminbi 9 Other potential opportunities include: Gain market share. Renminbi internationalisation unlocks new parts of the Chinese marketplace. Almost half (47%) of companies using renminbi believe it helps them to win more business 10. Lock in your prices. Fixing prices in renminbi means fewer price negotiations and adjustments down the line when exchange rates change, simplifying long-term arrangements. If you decide to move ahead, consider where to open a renminbi account. There are three choices: your home country; an offshore renminbi centre such as Hong Kong or London; or mainland China, where resident and non-resident accounts are available. This decision largely depends on where your business is located and the nature of your trade flows. There are some differences in the requirements and features of these three options, which HSBC can help you navigate. FX and interest rate risk Manage foreign exchange risk with renminbi One of the biggest challenges international business faces when doing business in China is managing foreign exchange risk (FX risk) and reducing that risk is a key benefit of using the currency. HSBC s renminbi study shows that 58% of renminbi users report the reduction of FX risk as a key factor behind using the currency 11. If renminbi becomes fully convertible something HSBC expects to occur over the next few years it could rapidly become the world s third most traded currency, leaping ahead of the British pound and Japanese yen. RMB is fully deliverable and freely convertible in the offshore market. This means companies can hedge their exposure by using the growing menu of renminbi derivatives to manage both FX and interest rate risk, including FX forwards, FX options, interest rate swaps, cross currency swaps and customised risk management solutions. Other potential opportunities include: Renminbi investment options. Ability to take advantage of a new market in renminbi-denominated debt and investment products, such as time deposits, corporate and government bonds. With the offshore renminbi market now more developed, companies can work with their global bank to ensure their treasury function can manage renminbi exposure effectively offering easy access to the expertise they need to trade and invest in the currency. Being able to manage risk in the offshore market makes using renminbi similar to using any other global currency.* *The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets. Investors are advised to consider carefully the special risks of investing in emerging market securities. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. 9 HSBC, RMB International Study 2014 (June 2014). 10 HSBC, RMB International Study 2014 (June 2014). 11 HSBC, RMB International Study 2014 (June 2014). 4

Liquidity and Cash Management Free trapped cash and integrate China into your global treasury services China s more relaxed regulations and improved financial infrastructure support another compelling reason for multinational companies to switch to renminbi: improved liquidity and cash management. Historically, multinationals could only repatriate cash from China through dividend payments, and this was an onerous and costly process. Changes in renminbi regulation now make it easier for multinationals to make cross-border movements of money between their subsidiaries. For example, for companies operating as part of the Shanghai Free Trade Zone (SFTZ), automated two-way cross boarder sweeping is now permitted. So a company can link its offshore and onshore cash pools, and sweep excess liquidity on an automated sweeping basis, as often as daily. Other potential benefits include: Improve working capital efficiency. The opportunity to implement a global or regional cash management strategy that incorporates China can further optimise internal funding ability and minimise external borrowing. Integrate shared service centres. It is now possible to establish a shared service centre service centre elsewhere in the world to in the world to manage all Greater China transactions. There are, however, good reasons to locate a service centre in China, including costs and the availability of talent. Designing a cash management strategy that centralises control, streamlines operations, and increases visibility of liquidity makes sense for many companies. As China is now, to a large extent, as accessible as many developed markets, the argument for incorporating China into a global or regional cash management strategy is increasingly compelling. The Importance of the Shanghai Free Trade Zone The launch of the Shanghai Free Trade Zone (SFTZ) in September 2013 was a significant milestone in China s financial systems. The Chinese authorities established the SFTZ to speed-up the development of domestic financial markets and to create a testing ground for broader liberalisation. For multinational corporations, the SFTZ opens up a world of trade capital investment and financing opportunities, including the ability to: Access offshore renminbi and foreign currency markets for funding. Invest in onshore markets (the Shanghai Exchange) and offshore markets with fewer restrictions. Streamline customs processes with expedited clearance of goods and materials. Gain greater access to China s markets and industries for foreign investors Simplify FX administration for direct investment since banks are allowed to handle the FX registration process directly. DHL, the world s largest logistics business, opened China s first truly modern international trans-shipment centre in the SFTZ a clear indicator of the significance of the zone for international trade. Dubbed the DHL North Asia Hub, the new facility is capable of handling 40,000 items every hour. Since the SFTZ is a test area for policies that may one day be implemented nationally (or across more free trade zones) it is important for all companies to follow developments within the zone. As one of the first foreign banks approved to establish a presence in the SFTZ, HSBC continues to stand at the forefront in supporting the country s financial reform initiatives, including renminbi internationalisation. 5

Renminbi case studies China s renminbi liberalisation has progressed to the point where the benefit of using the currency outweighs any restrictions or complexities. And further growth in the currency usage will be spurred on by the continued relaxation of controls and simplification of procedures around the currency. Companies can now use renminbi to streamline operations, cut costs and help mitigate risks. Many are already doing this and the case studies below showcase three ways companies have benefitted from using the currency. Cutting out a currency: One of Mexico s leading importers of frozen food was buying goods from its Chinese supplier in USD. The goods were sold to supermarkets, hotels and wholesalers in Mexico in Mexican Peso s (MXN), therefore the settlement currency did not match the final currency for both the buyer and the supplier. HSBC helped the company eliminate one currency (USD) from the chain. A renminbi-denominated letter of credit was used to source the goods from China and a MXN/RMB FX forward contract was put in place to hedge the transaction. This allowed the importer to negotiate better commercial terms, achieve more transparent pricing (no built in FX margin) and save on FX costs. Boosting working capital: A multinational construction and trading company (the exporter) with a base in Hong Kong was selling goods to a Chinese importer on the back of a USD-denominated, 90 day letter of credit (LC). The importer used the onshore FX market to convert renminbi into USD. The importer needed a 180-day LC to meet working capital needs, but this was challenging because of the Short Term Foreign Debt (STFD) quotas applied for banks in China. In addition, onshore financing was more expensive compared to offshore and local FX products are limited. The solution was for the exporter to switch to a 180-day renminbi-denominated LC, extending the credit period for its Chinese buyer (renminbi does not fall under the STFD quota). The exporter now uses the offshore markets for hedging and is rewarded with more orders from the importer. The importer has an improved working capital position and reduced FX transaction costs. The exporter can also discount the renminbi LC directly in renminbi or in USD. Sending FX risk west: Our client was a Hong Kong-based clothing manufacturer that supplied a large British retailer. The company sourced their materials from China both from their own and third party suppliers. Invoicing between all parties was in USD. This created FX risk and additional expenses for the suppliers, who have a largely renminbi-denominated cost base. We put in place a receivables finance facility that enables the manufacturer and suppliers to invoice, fund and settle sales in renminbi. FX hedging is now undertaken by the UK buyer, who can leverage offshore rates and get more competitive pricing by virtue of their size in the market. The manufacturer was able to negotiate better prices with the suppliers, while achieving more transparent pricing that was free of a built in FX margin. The firm also developed a centralised, regional treasury centre, allowing for more efficient FX management for intra-group payments. 6

Accelerate your renminbi strategy The emergence of a new global currency is a rare development, but when it does happen it dramatically changes the international business landscape. Over 150 countries already do business in renminbi every month, 23 territories have swap agreements in place and there are now five offshore global renminbi centres 12. Whether you want to use the currency to simplify operations, reduce risk, cut costs, expand liquidity or improve cash management, you will need to partner with a global bank that has strong renminbi capabilities. As the leading international financial services provider in China and the leading international bank for renminbi business. We have almost 150 years of experience in China. HSBC China became one of the first foreign banks to gain local incorporation and now has the most extensive branch network among foreign banks in China. In Hong Kong, HSBC is the largest bank incorporated in the territory. HSBC is a direct participant with all major clearing houses in China and Hong Kong. In China, HSBC has 167 outlets in 53 cities (plus 21 rural banks) Globally, HSBC serves around 54 million customers through a network of more than 6,300 offices in 75 countries and territories. One of HSBC s key advantages is its on-the-ground insight into China s evolving financial policies and regulatory conditions. Customers benefit from this depth of knowledge and experience that no other international bank can match, including: Global support: HSBC has renminbi capabilities and expertise around the world, and was the first bank to conduct renminbi transactions on all six continents. China experience: HSBC is the leading foreign bank in mainland China by renminbi licenses and capabilities, and by network size. HSBC was the first international bank to complete renminbi cross-border transactions in all mainland cities and provinces where we operate. Offshore market leadership: HSBC is a recognized leader in offshore renminbi markets in Hong Kong, London and elsewhere. HSBC led the first ever offshore renminbi bond and IPO, and issued the first renminbi bond outside Chinese sovereign territory. To find out more about how your business can start accessing the benefits of using renminbi, please contact your Relationship Manager or a HSBC Representative. HSBC renminbi services Payments and cash management Integrated Liquidity Management Solutions Integrated Receivables Solutions Integrated Payments Solutions Integrated Delivery Channel Solutions Trade and Receivable Finance Export Services Domestic Trade Import Services Global Markets Vanilla Foreign Exchange and Derivatives Interest Rate Derivatives Structured Investment Products. 12 HSBC, Overview of RMB Internationalisation, May 8, 2013. Data updated to 2014. 7

HSBC s RMB Experience HSBC s expertise in all RMB propositions, including trade, investment, funding 1 st foreign bank to settle cross-border RMB Trade in Hong Kong 1 st foreign bank to settle cross-border RMB Trade in all ASEAN countries, India with HSBC presence 1 st foreign bank to settle cross-border RMB Trade in all six continents 1 st foreign bank to offer RMB current account and cheque services in Hong Kong Strong onshore capabilities for clients banking needs in China 1 st foreign bank granted RMB corresponding banking license in China 1 st foreign bank to provide interbank RMB bond clearing/custody services in China 1 st foreign bank as market maker of RMB-Ringgit, RMB-NZD direct quotation in China RMB Going Out HSBC your bank of choice in international RMB business 1 st to provide continuous streaming of rates for six direct offshore RMB crosses on an interbank platform 1 1 st spot USDCNHdeal in market 1 st CNH FX option traded in market (Oct 2010) 1 st globally to trade deliverable RMB structured deposit 1 st CNH Multicallable Forward traded in market (Jun 2011). Over CNH 20bn of volume traded of multicallable and target redemption variations 1 st FX-linked index with CNH as component traded in market (with European client) 1 st to lead-manage RMB Certificate of Deposits in Hong Kong 1 st to execute RMB Interest Rate Swap in Hong Kong 1 st to launch RMB Structured Deposit in Hong Kong 1 st to launch Offshore RMB Bond from an Emerging Market Issuer, from a High-yield Issuer and International RMB Bond in London 1 st to execute CNH HIBOR interest swap on the same day the Treasury Markets Association announced its plan to launch the CNH HIBOR fixing Notes: 1. The six direct CNH crosses are EURCNH, GBPCNH, CNHHKD, SGDCNH, CADCNH and CNHMX To find out more about how you can start accessing the benefits of using renminbi in your business, please contact your Relationship Manager. For further information, visit: https://globalconnections.hsbc.com/global/en/topics/renminbi HSBC: China Business Network, Linkedin - https://www.linkedin.com/groups?gid=7486140 8

This guide contains information found in the public domain and other information that is subject to change. No warranty is given in any respect in relation to the material contained in this guide including, without limitation, as to the accuracy and completeness. The material contained in this guide in not intended to be advice on any particular matter. No person should place reliance on or act on the basis of any matter contained in this guide without considering appropriate professional advice. Any use of this guide is at the user s own risk. We expressly disclaim all any any liability to any person for any damages or loss suffered, whether direct or indirect in connection with this guide or in respect of any consequences of anything done or omitted to be done by any such person in reliance upon the contents of this guide. Issued by the HongKong and Shanghai Banking Corporation Limited. 9

This guide contains information found in the public domain and other information that is subject to change. No warranty is given in any respect in relation to the material contained in this guide including, without limitation, as to the accuracy and completeness. The material contained in this guide in not intended to be advice on any particular matter. No person should place reliance on or act on the basis of any matter contained in this guide without considering appropriate professional advice. Any use of this guide is at the user s own risk. We expressly disclaim all any any liability to any person for any damages or loss suffered, whether direct or indirect in connection with this guide or in respect of any consequences of anything done or omitted to be done by any such person in reliance upon the contents of this guide. Issued by the HongKong and Shanghai Banking Corporation Limited. Approved for issue in the UK by HSBC Bank plc, 8 Canada Square, London E14 5HQ. AC29600. Please note that deposits and investments made with offices outside of the UK are not protected by the rules made under the UK s Financial Services and Markets Act 2000, including the Financial Services Compensation Scheme, and the UK s Financial Ombudsman Service. 9