This article was published in the AFP Payments Newsletter – February 2013
Alfred Nader of Western Union Business Solutions provides details on how much money corporates can save by making paymentsto China in renminbi
There is an economic revolution taking place about half a day’s flight from the U.S. but very few American media outlets are covering the topic. Every once in a while you’ll have an article tucked away in the third or fourth section of a newspaper, but it’s not being given the attention it merits. I’m talking about the internationalization of the Chinese renminbi (RMB). And why should you care? Simply put, not knowing about it is costing American businesses millions of dollars annually.
Internationalizing the RMB
Before 2009, if you were doing business with China, you were doing it using the U.S. dollar because you had no other alternative. Prior to 2009, the Chinese government didn’t allow any payment to be done in the RMB. Trade and investment was done almost entirely in the USD and with other major currencies spattered in for good measure (EUR, GBP etc.).
The use of renminbi offshore—outside of China—for trade settlement was announced in 2009 as the first step in internationalizing the RMB. The codes CNY and CNH were used by financial institutions to differentiate between onshore and offshore RMB. The “H” in CNH stands for Hong Kong, the main global hub for the offshore renminbi. Under the new rules, qualified export businesses in China may invoice and settle trade transactions in RMB.
In 2009, the Chinese government started to experiment with allowing nearly 400 companies to settle trade using the RMB. These companies, who had governmental permission to send and receive cross-border RMB, were given the designation of Mainland Designated Enterprise (MDE).
By 2010, the Chinese had expanded the experiment to 20 provinces and had a growing number of companies who were allowed to conduct cross-border payments in the RMB. By 2011, the Chinese had given this designation to over 67,000 companies to settle trade in the RMB and had opened this ability to all of China.
In early 2012, the People’s Bank of China expanded its pilot program, which essentially did away with the MDE designation and opened up the ability to settle trade in the RMB to all Chinese corporations with an import/export designation on their business license. Businesses in China could, for the first time in modern history, settle trade in their home currency. But what happened in the United States? Barely a mention. It wasn’t news to American media.
In 2011, Western Union Business Solutions conducted a survey of over 1,000 MDEs to ask them about many of their preferences in cross-border payments. There were three main questions:
1. What is your preferred settlement currency? Near 40 percent of respondents prefer to receive the RMB vs. 27 percent choosing the USD.
2. Do you incur costs when receiving payments in a foreign currency? 74 percent said they experience additional costs.
3. Do you add additional fees to your invoice to account for foreign exchange risk? Those who admitted to adding a surcharge of some kind added an average of 3 percent on each invoice.
American businesses could be paying 3 percent more on all of their imports from China. That’s an additional $30,000 lost to China for every million dollars worth of goods imported. But this isn’t just one study. In August of 2012, Deutsche Bank reported that for companies paying exports in RMB the savings averaged 4.8 percent per invoice. In October of 2012, the PBOC was quoted as saying that importers could save between 2-3 percent by paying in the RMB. If the central bank of a country makes such a statement, alarms should be going off at every business dealing with China. Three sources are saying that American businesses could be losing between $20,000-$48,000 on every $1 million paid for goods imported from China. This is money that could be used to expand your business, hire more Americans, return to shareholders or perhaps pass along the savings to your clients.
What to do
There are still countless Chinese business leaders who are unaware of the recent changes in their law and what they are now able to do. The first step that an American business should consider is finding a financial service provider who is experienced with transacting in the offshore RMB. Second, and this is the most important part, is to reach out to your Chinese counterpart to inform them that you’re able to pay invoices in the RMB. Don’t use the terminology onshore/offshore, CNY/CNH. Simply use the term RMB to avoid confusion. Ask them if they would prefer to receive payment in the RMB. If they say yes, perfect, then it’s time for you to negotiate down using the fact that they will no longer need to account for exchange rate fluctuation. If they say no, well, it’s also time to negotiate and make a decision regarding having full visibility on price.
Since the use of RMB for cross-border payment and trade settlement is a recent development in China, some businesses may not be aware of the new rules around RMB payments. You should encourage your trade partners to reach out to their banking providers and learn about the new RMB rules and whether they can be set up to receive RMB payments. Your financial services provider should be able to provide you with both English and Chinese language literature to help your trade partners to understand the new regulations for cross-border payment in RMB.
Alfred Nader is Vice President, Corporate Strategy and Development at Western Union Business Solutions.
Countries: United Kingdom and United States