New Zealand exporters can minimise their exchange rate risk as well as improve price competitiveness by transacting directly in the Chinese yuan (renmenbi).BY BOB EDLIN
More favourable terms with Chinese clients could be within grasp of New Zealand traders who are paid or pay in renminbi – or RMB – potentially widening the number of Chinese companies with which they do business.
New opportunities are available for managing RMB currency exposure, too.
Until mid-2010 international trade deals with Chinese clients had to be transacted in foreign currency, mostly US dollars, although Hong Kong banks have been allowed to conduct some limited personal Chinese RMB business since 2003.
But in June last year RMB transactions were allowed beyond China, albeit via Hong Kong.
RMB ACCOUNTS
Currency advisers say this significant development should help firms hedge their exchange rate risk and allow importers and exporters to find “natural hedges” in their balance sheets if they hold RMB accounts.
The change followed a trial of RMB cross-border flows in some Chinese regions.
RMB transactions have quickly caught on. In just six months, cross-border trade settlements between Hong Kong and China increased 10-fold to be worth nearly $20 billion by December.
At the same time trade between China and New Zealand has been growing rapidly. China last year displaced the United States as our second largest trading partner and our second largest export market after Australia.
The RMB previously had been pegged to the US dollar. It is now pegged to a basket of fixed currencies, although Chinese authorities won’t identify the six currencies or what portion each accounts for in the basket.
The conversion of RMB into other currencies is still strictly controlled by the Chinese central bank, Bank of China.
But the process doesn’t need to be too daunting for exporters.
Banks such as HSBC and ANZ will source the currency from the approved banks and pass it on to their clients.
TAKING OVER EXCHANGE RATE RISK
Exporters are urged to note that the onus is on the Chinese customer to obtain the necessary approvals to be able to remit RMB funds to Hong Kong accounts.
HSBC in New Zealand carried out its first RMB transaction for a client in August after meeting criteria set down by the People’s Bank of China for a trade settlement.
Cath Henry, HSBC head of global payments and cash management, said the new currency regime means traders can send RMB to China or receive RMB from China up to the amount of the trade or service settlement.
A big benefit is that exporters dealing with China no longer have to trade in US dollars, a country which neither country uses as their base currency, said Henry.
Both parties to a trade deal are taking exchange rate risks when transacting in US dollars.
By transacting in RMB, exporters effectively can take over the exchange risk from their customer in China, enabling them to manage it within their pricing.
“They can get a better price if they can include it in their price as an exporter,” Henry said. “We are seeing some of that already.”
She encourages clients with business in China to ask for an RMB quote as well as a US dollar quote.
Price differences can arise because the US dollar fluctuates with both the NZ dollar and RMB independently.
It’s important that an exporter’s customer in China understands or knows about the changes in the rules. HSBC is finding it is easier to deal in RMB with companies on the east coast of China because they were part of the pilot and have experience with it already.
The bigger banks are located there, too.
HSBC analysts predict a third of China’s cross-border trade will be settled in RMB by 2016.
Henry cautions that New Zealand exporters will be at a disadvantage if their Asian competitors are accepting or paying in RMB while we stick to US dollars.
ANZ New Zealand completed its first RMB deal in January.
David Green, ANZ New Zealand’s managing director (institutional), agrees exporters should be positioning themselves to take advantage of the new opportunities.
He also emphasises that obtaining the necessary approvals “is an absolute prerequisite to enable the trade to be concluded in RMB”. It is critical, therefore, “that the New Zealand company has this initial conversation with their Chinese counterpart”.
Once payment terms are established with the Chinese client and approval for offshore RMB remittances has been confirmed, the payment methods are the same as for other countries. Letters of credit and open account transfers are both options for RMB deals.
As with any foreign exchange trading, there are risks. It is essential, therefore, to get advice specific to your circumstances.
SPECIALIST HELP
“Look for specialist foreign exchange advice appropriate to New Zealand, backed up by networks in Hong Kong and China to provide local insight,” said Green.
“Having direct access to RMB is akin to having a new currency - one that will inevitably become a leading international currency.”
Green reiterates that exporters should be positioning themselves to take advantage of the new opportunities associated with the RMB as it gradually becomes an international currency.
“Dealing directly in the client’s currency may have significant benefits over working through a third currency,” he said.
“Some people may still need an account in mainland China, requiring establishment of a locally incorporated entity. But for many Kiwi importers and exporters who have no physical operations in China, the regulatory changes enable them to use the easier option of accessing or receiving RMB via Hong Kong.” [END]