Monday, January 23, 2017

Why US business can no longer ignore the Renminbi

Trading in the Chinese Renminbi (RMB) is now an everyday event for many US corporates – but care is still required if businesses are to benefit fully from the currency.

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A few years ago, the rise of the renminbi (RMB) was the subject of frenzied global speculation. Today, according to HSBC's Debra Lodge, it's "just another currency" – a description that reveals just how far the RMB has travelled.

The RMB has taken its place alongside the US dollar, euro and British pound: it is now the focus of the same sophisticated FX strategies as those elite currencies.

It also enjoys substantial liquidity. "When we do $200m to $300m worth of trade in renminbi, it doesn't even move the market – that's how liquid the market is," says Lodge, who is the bank's Head of Renminbi Business Development for the Americas.

When we do $200m to $300m worth of trade in renminbi, it doesn’t even move the market – that’s how liquid the market is

Debra Lodge, Head of RMB Business Development, HSBC

Global surge

Now the world's second most used currency in trade finance, the renminbi is used to settle more than a quarter of China's trade. 1

The latest advance came in November, when the IMF added the renminbi to its Special Drawing Rights basket.

Further liberalisation will be required before the renminbi becomes a full reserve currency, but Lodge sees SDR status as a major milestone: "Ultimately it will result in increased usage of the renminbi as a global currency."

US businesses are aware of this change and increasingly open to embracing its implications, according to Lodge. She now sees corporations injecting renminbi into China, instead of turning to the US dollar by default.

While smaller, more agile companies were fastest off the mark to see the potential of dealing in the new currency, bigger corporates are now exploring their options too.

"Big multinationals, for example, who manufacture in China, and have always paid for their goods in US dollars, are starting to change the way they do business," Lodge says.

Big multinationals, for example, who manufacture in China, and have always paid for their goods in US dollars, are starting to change the way they do business.

Debra Lodge, HSBC

Hedging requirement

Some have been nudged into action by the depreciation of the RMB. HSBC recently amended its exchange rate forecast, suggesting that 2017 would see the US dollar equate to 7.2 renminbi, after hovering round the 6.5 mark for much of 2016.

This has implications both for businesses invoicing in China and for those with onshore subsidiaries that have taken a US dollar loan from offshore: "Wherever businesses have exposure, if the RMB is going to be depreciating then there is a need for a hedging program," Lodge says.

Many corporations are taking a step back to explore potential efficiencies, covering FX, payments, and even side-issues such as the number of Chinese bank accounts set up under historic rules.

A knowledgeable partner on the ground is essential. "You need to work with a team that can help you in your own time zone, but is well connected to a sizeable onshore team in China. Having a rep office in China is not the same as having a full banking license there," Lodge points out.

Next steps

The RMB's progress will not let up any time soon. In 2017, HSBC expects to be able to offer renminbi accounts in the US for the first time. Ultimately, this will enable same-day payment settlement with China.

"Europe already offers same-day settlement, and it will be a wonderful thing for us to offer businesses the same in China," Lodge says.

To learn more about the RMB and China visit: Renminbi Solutions

1 HSBC RMB internationalization survey, 2016

This article is intended solely for informational purposes. HSBC Bank USA, N.A. assumes no obligation to update or otherwise revise this article. The information, analysis and opinions contained herein constitute our present judgment which is subject to change at any time without notice. Nothing contained herein should be construed as tax, investment, accounting or legal advice. In all cases, you should conduct your own investigation and analysis of each potential transaction, and you should consider the advice of your legal, accounting, tax and other business advisors and such other factors that you consider appropriate. This is not a recommendation, offer, endorsement or solicitation to purchase or sell product or service.

HSBC Bank USA, N.A. 2016. ALL RIGHTS RESERVED. Member FDIC.

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