The Rise of Renminbi

Using the Chinese Currency Can Help U.S. Companies Cut Costs and Grow [ By Prabhat Vira ]

CLOTHES THE SALE A worker detaches silk from cocoons in Suzhou, China. American garment makers transacting silk purchases in renminbi are one example of U.S. producers that could save money by settling in the Chinese currency.

CLOTHES THE SALE A worker detaches silk from cocoons in Suzhou, China. American garment makers transacting silk purchases in renminbi are one example of U.S. producers that could save money by settling in the Chinese currency.

For U.S. companies doing business with China, or competing for a share of its growth, the renminbi is now an effective way to settle trade, make investments and deepen relationships.

If that sounds like a bold claim for a controlled currency, consider how far China has opened itself to the world in just a short space of time. Trade between the U.S. and China has grown rapidly over recent decades, pulled forward by the twin locomotives of extraordinary Chinese domestic growth and increasingly transnational industrial assembly lines. HSBC research indicates that Chinese gross domestic product is set to increase by 8.6 percent in 2013, and next year China will add more to global growth than ever before.

Meanwhile, China has been loosening controls on the renminbi to establish it as a global trade currency and eventually a reserve currency. Today, according to HSBC research, about 10.5 percent of China’s trade—worth more than $400 billion—is settled in renminbi. HSBC expects that share to rise to more than 30 percent by 2015, or to about $2 trillion, as companies become increasingly aware of the potential benefits of invoicing and settling in the Chinese currency.

So what are the benefits and why should a U.S. company care about the renminbi?

 

Competitive Pricing

Through a combination of renminbi trade settlement and foreign exchange hedging, companies may reap considerable savings.

In the past, Chinese suppliers have typically needed to add a buffer of between 1 and 3 percent to their quotes to hedge against unfavorable exchange rate movement before a trade settles. By settling in the Chinese supplier’s currency, U.S. businesses may be able to avoid this additional cost. In fact, an HSBC survey of Chinese companies involved in international business showed that 41 percent were willing to consider discounts of up to 3 percent on renminbi-denominated settlement, and 9 percent were willing to give even larger discounts.

BANK ON IT! Is settling in RMB right for your business? Prabhat Vira, regional head of Trade and Receivables Finance at HSBC says you should consider it.

BANK ON IT! Is settling in RMB right for your business? Prabhat Vira, regional head of Trade and Receivables Finance at HSBC says you should consider it.

So, if a U.S. company is importing from China, it can issue a renminbi-denominated letter of credit or other instrument, and its Chinese supplier no longer needs to add a foreign exchange premium to the price it quoted for the goods it’s selling. As a result, the U.S. company may be able to offer more competitive pricing when it resells those imported goods, or after it uses them to produce other goods.

Likewise, if a U.S. company is exporting to China, its ability to deal in renminbi may give it greater flexibility in meeting its Chinese buyer’s needs, and so greater opportunity to sell goods and services into the country.

Until recently, there was a perception that the renminbi was undervalued against the dollar and would only appreciate, making it relatively expensive to hedge. Now, however, the markets have moved closer to accepting that the currency is close to its long-term equilibrium value, making forward hedging significantly cheaper.

 

Global Footprint, Lower Funding Costs

Though the renminbi’s life as an international currency only began in 2009, its rapid development has been helped by decreased restrictions. Remaining restrictions focus on investment flows into and out of the capital account, rather than on trade.

But, here too, regulations are being relaxed. Between 2011 and 2012, the share of China’s inbound foreign direct investment conducted in renminbi leaped from 12 percent to 35 percent as multinationals recognized the benefits of centralizing their treasury operations offshore and using China’s currency for local capital injections. Now, developments in cash management regulations mean that investments in China can increasingly be treated as they would in any other market, allowing funds to be deployed efficiently and conveniently.

Hong Kong has played a leading role in the global expansion of the renminbi and is still the largest and best developed offshore market for hedging and credit products. But China is in the process of widening the network of clearing centers outside the mainland, encouraging the development of new markets. Taipei recently began accepting renminbi deposits, for example, while Beijing has appointed a clearing bank in Singapore and negotiations continue with London.

And just as its geographic footprint is growing, the renminbi’s functional reach is being extended as new, more flexible products are developed. Deliverable futures are now traded in both Hong Kong and Chicago, spurring the currency’s integration with the global financial system.

 

New Suppliers, New Consumers

By adopting the renminbi today, U.S. companies can build strong relationships with a wider network of Chinese partners. Because the renminbi is convenient for Chinese counterparts, U.S. importers who use it potentially open themselves up to a new layer of smaller Chinese suppliers who may prefer the ease of using their own currency, or who may be reluctant to take on dollar exposure because their cost base is denominated in renminbi.

What’s more, it may pay a relationship dividend for those looking to sell into China. Being an early adopter can help secure market share as competitors jostle for position in one of the world’s fastest-growing consumer markets.

HSBC research predicts that between now and 2050, the average Chinese worker’s income will increase seven-fold, from around $2,500 to around $18,000, giving some sense of the potential for growth this market holds.

In short, the evolution of the renminbi now represents an opportunity for U.S. companies to cut costs and improve financial flows in the supply chain. Ultimately, it may also be a way to start new business relationships and to tap a vast pool of aspiring customers. That’s no mean achievement for a currency still new on the international stage.

Searching For The Right Bank

5 Questions To Ask Your Financial Institution About Its Global Capabilities [ By Elaine Pofeldt ]

RUSSIAN TO JUDGMENT: Mike Arman wanted to buy these Russian military hats to sell in the U.S., but his bank refused to wire funds to the seller in Russia.

RUSSIAN TO JUDGMENT: Mike Arman wanted to buy these Russian military hats to sell in the U.S., but his bank refused to wire funds to the seller in Russia.

Sotiria Krikelis thought she’d picked the perfect bank for her company, which makes Relax Missy foldable ballet flats that women can slip into a purse when they want relief from painful high heels. She sailed through the application for a small-business loan to finance production runs in China in two weeks. The big, global institution even gave her free letters of credit, which her factory required up front.

But there was a hitch: Bank employees botched the inputting of basic information on Krikelis and her three-year-old, New York City-based business, One Life, Live-It, Inc.—and the agony of actually getting the letter of credit delivered was akin to walking in cruel shoes. “Anything you can imagine went wrong, from the misspelling of my business name to the inputting of my Social Security number,” she says. “When they did have to create the letter of credit, they couldn’t find my business name on file or my Social Security number on file.” It took endless phone calls to resolve the problem.

Krikelis kept her loan with that bank but moved her checking account to TD Bank, where she’s never had a problem. As she found out, it can be tricky to figure out which bank is best equipped to handle your global financial needs. A domestic institution that sounds great on paper may turn out to be poor at executing the transactions you need or lack the specialized know-how to do business in your target market efficiently. And if you choose a foreign bank, you could get stung by unfamiliar laws and regulations—and even instability in the local economy that puts your money at risk. “Be careful. Be very, very careful,” advises Mike Arman, an Oak Hills, Florida, entrepreneur who has been involved in the import-export business for 30 years.

So how do you find a bank that works for you? Here are some questions to ask.

 

How complex are my needs?

If you’ll only be making simple transactions where you pay in U.S. dollars, don’t rule out your existing bank. It may be great at handling your needs. Herman A. Harrison, who runs 30-employee Foster Transformer in Cincinnati, has worked with a joint-venture partner in China for more than a decade to make some of his electrical products overseas. He negotiated arrangements to conduct transactions with his overseas partner in dollars, so they rely on wire transfers. “That’s about as complicated as it gets,” he says. He has found that his regional bank, PNC, can handle them just fine.

Businesses that will have transactions in a variety of countries or use a foreign currency may need to shop around to find a bank that can handle their particular needs. “The small business has to do a strategic map of where it is going in the next three to five years. Which of the countries are going to be relevant?” says Sankar Krishnan, director of banking and insurance marketing at Sutherland Global Services, a business process outsourcing company based in New York.

Once you know where you’re headed, find out which banks have a physical presence in those markets or are part of networks that operate there, he advises. “As a small or medium client in the U.S., you are better served by the global banks that operate in those markets,” says Krishnan. For leads, he suggests trying the Banking Association for Foreign Trade, a group for organizations involved in international transaction banking, and the Export-Import Bank of the U.S. Ask if the bank offers “multicurrency accounts,” a relatively new product. As the name suggests, they will enable you to conduct transactions in a variety of currencies from the same account, so you don’t have to have two separate accounts for deals done in, say, U.S. dollars and the euro, saving you money.

 

What level of customer service does it offer?

A bank that does a great job with domestic transactions may not be great at handling international ones. No bank is going to tell you that it will treat your business as a headache, but you can get an idea of what’s ahead by asking how often it handles foreign transactions. If the team at your branch seems clueless, move on.

Arman was taken aback when his former bank, a mid-sized domestic institution, didn’t want to handle his wire transfers to a company in St. Petersburg, Russia, to purchase items like fur hats used by the military to sell in the U.S. “They were nervous about it,” he says. His banker finally asked him to take his account elsewhere. He withdrew his $85,000 on the spot and moved it to another bank down the street.

You’ll often get better service at an institution where bankers don’t get shifted around among branches frequently and you can develop a rapport with one person. Krikelis had such a relationship at the bank where she still has her small-business loan—until her banker was transferred to a new branch—but, because of frequent changes of personnel at the bank, has never been able to find someone to give her the same ongoing, personal service. “Whenever I go in to see someone, it’s always someone new,” she says.

At TD Bank, however, she has built a strong relationship with her banker over the past several months, and that’s made life easier. “He is willing to work with you on things,” she says. She has made a number of overseas wire transfers there and has never had a problem. “It works out beautifully,” she says.

A good relationship may save you money. Ted Scofield, general counsel of New York City-based Icebreaker Entertainment, which has manufactured games in China and now has 18 licensing partners that manufacture its products, says that his banker—also at TD Bank—is so helpful that he’s willing to drop the bank’s wire transfer fee. “We always ask them to waive the fee, and they do,” Scofield says.

 

How does it handle foreign currency conversions?

If you will not be trading in U.S. dollars, picking a bank that manages currency conversions frequently will make your life easier. “Any bank should be able to do it,” says Craig R. Arends, a partner in the CPA firm and consultancy CliftonLarsonAllen LLP in Milwaukee, Wisconsin. “The key question is: What does the process look like? How long does it take? What are the fees associated with it? Some banks have higher fees than others.”

If you run a substantial size business doing a heavy volume of overseas sales, pick a bank that can help you to manage currency risks. “If there’s a devaluation of the currency you’re in, you’re going to lose money,” says Arends. Some banks do derivatives transactions that will help clients offset the risk, he says.

 

Does the bank do business in the market you’re entering?

Banks need to understand the local regulatory environment in any country you’re entering and stay on top of political and economic events that may affect your transactions—which is hard to do from a distance. “You’d want to hear that they have people on the ground in that country, either directly associated with them or through some type of international affiliation,” Arends says. “If they don’t have their own bank or an affiliate there, it’s not the bank you want to go with.”

 

Would you be better off with an overseas bank account?

Some big banks have global branches where you’ll be well served. However, sometimes you may need a bank account in an overseas institution. Say, for instance, you’re going to sell the products you manufacture to consumers in Spain through a web store. It may be easier to handle the transactions through a bank that’s based in Spain than one in the U.S., says attorney Dara Green, director of international tax with the CPA firm Kaufman, Rossin & Co. in Miami. That may also be true if you have set up a business entity in another country to handle sales generated there and need to pay taxes on that income under existing treaties.

To make the right choice for your business, think through how you’ll be receiving and making payments to vendors and others before deciding what type of account to open, Green advises. Foreign banks may not roll out the welcome mat. Expect to provide extensive information about what type of business you run, who owns it and where it’s getting money. “They basically have to know everything about it,” she says.

To prevent tax evasion, the Foreign Account Tax Compliance Act (FACTA), enacted in 2010, requires all foreign financial institutions to report to the IRS on accounts and holdings of their U.S. clients, both individuals and companies in which they have a substantial ownership interest. “It complicates things,” says Green. “A lot of foreign banks don’t like having a U.S. account holder at all.” Some foreign banks are even purging accounts by U.S.-based clients, she says.

To get a sense of what opening an account will be like at a foreign bank, call and explain your type of entity to bank officials, that you’re based in the U.S.—and want to open an account. Ask: “What information will you need from me, and what restrictions will I have if I open an account with you?” You’ll find out quickly if any obstacles are insurmountable.

Bear in mind that foreign banks are subject to the rules of the countries where they operate—and your money may not be as safe there as it is domestically, in a bank where deposits are protected by the FDIC, says Arman. “I don’t think I’d want to have a bank account in another country unless I knew exactly what I was doing.”