Further steps to RMB internationalisation

February 2013

Recent foreign currency cross-border sweeping announcements by Standard Chartered China/Shell China and Intel/HSBC, followed closely by Citi and a European food company’s cross-border renminbi (RMB) lending pilot, marks a milestone towards deregulation in China and signals more to come.

Following in the wake of recent announcements of State Administration of Foreign Exchange’s (SAFE) foreign currency cross-border sweeping pilots conducted by Standard Chartered China and Shell China and Intel and HSBC, Citibank (China) Co. (Citi China) announced it has completed its first cross-border lending transaction in renminbi (RMB), conducted on behalf of a European food company.  The money was lent to the company’s regional treasury centre in Singapore, in order to leverage its China operation’s surplus cash and achieve greater efficiency in its global fund usage and allocation.

Previously multinational corporations (MNCs) in China could not lend surplus cash to overseas entities in RMB, so this marks an important deregulation milestone for China.  The addition of RMB into overseas treasury pools provides companies with new choices and flexibility to centralise treasury management and optimise funds usage by tapping excess cash in China, which many MNCs have accumulated in RMB.  This structure provides a fresh source of internal funds that can now be freely used by MNCs globally, upon the central bank’s (People’s Bank of China (PBoC)) approval.

“This will also signify important progress of RMB internationalisation by establishing a bigger role for the currency in multinationals’ treasury management globally,” says Yigen Pei, Country Head of Citi Transaction Services for China.  “By launching this initiative, the PBoC is sending a strong signal that it will allow qualified MNCs to use RMB as an international currency for their treasury management.”

But at this stage not many MNCs have qualified because this is a pilot programme and subject to PBoC’s screening process.  The central bank considers whether the onshore company is robust and strong enough to lend money, so it examines the balance sheet, P&L and cash flow of the onshore company, as well as the purpose for overseas usage, how the RMB will be deployed, and whether an acceptable repayment plan is put in place.   “At this stage the PBoC will only consider MNCs which have solid reputations and risk management policies in place, both in China and at the global/regional treasury centre,” says Pei. “With the European food company, the process was relatively straightforward but this is not the same for all companies.  And we expect the process will become much easier to follow in future, as more MNC join alongside.”

Slow and steady

The PBoC has overseen step-by-step deregulation over the past three and a half years.  The central bank first introduced the RMB cross-border initiative in July 2009 to provide companies with greater foreign exchange (FX) savings and operational efficiencies as well as to promote the internationalisation process of RMB.

At the outset, the scheme involved only a few cities – Shanghai, Guangzhou, Shenzhen and Dongguan Zhuhai – and focused on trade of goods.  The offshore participants in the pilot had to be located in Hong Kong, Macau or 10 ASEAN countries.  It then gradually expanded to service trade and other current account items, such as dividends, and operated nationally.

In 2011 there was further deregulation, with Chinese corporates able to make outward-bound direct investment (ODI) in RMB at the beginning of the year, and in June foreign enterprises were permitted to remit offshore RMB back to Mainland China in the form of foreign direct investment (FDI), again subject to PBoC approval.  In October capital injections and RMB cross-border loans (from shareholders, affiliate companies or financial institutions) were also permitted.  In March 2012, RMB settlement for exports was extended to all of China.

In November 2012, PBoC granted approval to Standard Chartered Bank (China) for a RMB3.3 billion loan quota on behalf of a leading US MNC client that specialises in global manufacturing and technology.  More recently, eight to 10 Hong Kong-based banks – including HSBC, ICBC and Standard Chartered – signed agreements for RMB2 billion of cross-border loans to mainland Chinese firms in the Qianhai district of Shenzhen.

Although much progress has been made, there are many things still to be done, says Pei.  “RMB internationalisation is increasingly linked with the deregulation of China in terms of interest rates, exchange rates and capital accounts.  Without all these taken together, RMB cannot be fully convertible or internationalised,” he says.  He expects that trade settlement liberalisation will be rolled out from Shanghai and spread to the rest of the country.  “This would enable a company to use relatively straight-through processing (STP) for cross-border settlement in RMB, as well as truly cross-border shared service centres (SSC) and account centralisation.”

Pei believes that over the next few years, the PBoC will allow easier convertibility of offshore RMB.  “If gradually more convertibility is allowed and the offshore and onshore markets converge, then I think the RMB will be an important currency choice for MNC treasurers.” 

The Chinese government certainly has its sights set on RMB internationalisation.  During a visit to PBoC headquarters in Beijing on 21 January, Premier Wen Jiabao stressed the importance of “improving the RMB exchange rate regime, promoting the use of RMB in cross-border trade and investment activities, and gradually realising RMB convertibility in capital account.”

This insight was first published on www.treasurytoday.com