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China opens up for European mid-caps
China has not always been the easiest market to access for European mid-caps which, unlike more established multinationals, have often struggled to get to grips with local trading differences and regulation – especially regarding settlement in, and movement of, the renminbi, comment Frank-Oliver Wolf, global head of cash management and international business, and Martin Keller, European head of interest, currency and liquidity management, at Commerzbank
Frank Oliver Wolf 23 Oct 2014
 
   
The renminbi has gone from strength to strength. Certainly, its use has dramatically increased since 2009, when China allowed it to become partly convertible in Hong Kong. And further liberalization over the last 12 months has seen the renminbi become the world's seventh most-used currency in terms of payment transactions,  as well as the second most-used currency after the US dollar in terms of trade.
 
To date, much of this growth can be attributed to trade conducted by a first wave of multinational companies. Yet China is now becoming an increasingly attractive trading and investment destination for mid-sized businesses with an eye for international expansion.
 
In this respect, there are two key developments which are encouraging European mid-sized companies to trade with China and embrace the renminbi as a settlement and invoicing currency. The first is the establishment of offshore clearing hubs at home in Europe, with Frankfurt appointed the first official European clearing centre in April, followed closely by London, Luxembourg and Paris. It is expected that these centres will further boost transaction settlement within Europe, which now represents 10% of renminbi payments worldwide in value.
 
The second key development relates to the latest relaxation of Chinese currency controls, enabling companies to send onshore liquidity more easily outside of China. Although not quite yet a viable currency for global cash management, the increasing speed of the renminbi’s liberalization indicates the need for corporates to re-think their treasury-setup regularly.
 
Yet, to make the most of these opportunities, it is clear that mid-sized companies – without the experience, contacts and treasury and legal set-ups of large multinationals – cannot go it alone. And this is where the expertise of their banking partner becomes essential.
 
Embracing the renminbi
 
Until recently, many mid-sized corporates have been slow to invoice in renminbi with more than 90% of them still conducting their business with China in USD or euro. This is, in part, owing to the perceived complexity of the currency’s regulation.
 
Of course, it will take time for a shift away from the dollar-denominated trading with China that corporates have been used to for the past 20 years. Yet there are numerous advantages to settling in the Chinese currency.
 
Principally, by invoicing in renminbi, European corporates can gain a competitive edge and strengthen business relationships, given that an increasing number of Chinese companies now prefer to be invoiced in renminbi to eliminate currency risk. The ability to offer renminbi invoicing is likely to broaden the number of potential partners, and offer new opportunities for expansion. 
 
By bearing the exchange rate risk and reducing administrative costs for their Chinese counterparty, international corporates may also be able to negotiate better trade terms or seek a discount on goods or services purchased.
 
Offshore clearing hubs
 
And the renminbi’s internationalization has also brought about another key development which is making it easier for mid-cap corporates to switch to settling in renminbi: the wave of European offshore clearing hubs allowing EU corporates to settle directly via their local market.
 
Having a clearing hub located closer to home means that international treasurers no longer need a long arm into China for their ren business because they can take control from their European office, rendering the payment chain more transparent.
 
In addition, the possibility to settle renminbi business in the local time zone also enables mid-cap companies to actively manage their currency risk and cash management through their local banking partner that speaks their own language and is more likely to be familiar with their business.
 
Furthermore, from a risk perspective, foreign corporates have a greater ability to manage their FX risk through the offshore market. This is because an offshore account provides the most options for hedging currency risk, with a broad range of currency instruments available. The need to actively manage currency risk has become even more acute following the widening of the renminbi trading band from 1% to 2% earlier this year which has resulted in increased volatility of the renminbi.
 
Indeed, switching to settling in renminbi should pose no difficulty for mid-market companies, as a full range of global banking services are now available to help these businesses manage the renminbi as they would any other currency.
 
Trapped cash
 
Of course, not all trade will be able to be settled via an offshore clearing hub, which is why recent developments easing the flow of renminbi across borders are significant.
 
Historically, one of the key challenges of trading with China has been the risk that a company’s hard-earned cash may become trapped onshore, owing to regulation and capital requirements. The transfer of capital remains highly regulated, however, the good news is that as regulatory restrictions have eased on cross-border cash flows over the last six to nine months, trapped cash has now become more accessible through the introduction of cross-border renminbi intercompany loans.
 
Certainly, the introduction of this instrument – where companies with operations in China can send surplus cash to their offshore units – is big news for middle market treasuries, which prefer to have the possibility to move their cash beyond borders to make sure it is used where it is needed the most.
 
And this development also constitutes another step towards global cash pooling. The same applies to the Shanghai Free Trade Zone (SFTZ). Yet despite other large German banks claiming to have a superior product offering through their presence in the SFTZ, the truth is, not one German SME has so far been able to create a global cash pool with China.
 
However, what the SFTZ does show is how China envisions the future of its currency in cross-border transactions. In this respect, it is important for banks to frequently monitor and communicate these developments to their clients that can have a positive impact on their business, such as the Frankfurt renminbi clearing hub.
 
RMB part of a strategic growth plan
 
While such market and regulatory developments may not necessarily bring vast changes for multinational corporations – who have been invoicing and settling in renminbi for years –it is certainly of vital importance to mid-sized companies looking to expand into China.
 
Yet keeping abreast of the changing landscape can be difficult for smaller corporates without an on-the-ground presence or specialist compliance team. Therefore, when looking to expand into China, mid-sized companies need a bank that not only has a local presence in their domestic market –and can reduce the complexity of their currency risk management – but also one that has a strong presence onshore in China. Certainly, China’s complexity means that keeping on top of the rapidly-changing market is impossible without this relationship. 
 
 
While China can be a challenging place to do business, the renminbi’s internationalization is now opening up a realm of opportunity for international mid-cap companies.  This growth market is an obvious place for mid-market corporates to consider exporting to and, with the help of a dedicated expert banking partner, there is no better time to seize the opportunities.
 
Frank-Oliver Wolf, global head of cash management and international business, and Martin Keller, European head of interest, currency and liquidity management, at Commerzbank
 
 

    

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