The Path to Bolder RMB Implementation Roundtable Series wrapped up its US tour with a final stop in Menlo Park on March 5, 2015. As was the case with our two previous stops in Chicago and New York, many meeting attendees were from companies who have been in China for 20-plus years. But this time we also had one company brand new to the Chinese market with plans to launch its business there next week.
Overall, treasurers and senior finance professionals at the roundtables have appreciated the timeliness of the renminbi (RMB) discussions and have walked away with a better understanding of what’s possible in China as they continue to refine their global liquidity management strategies and roll RMB into their global planning.
The theme of "Be Bold, but Cautious" played out again in Menlo Park as we heard from Tina Kobetsky, Vice President and Treasurer at VMware who described her company’s successful project to redenominate all trade activity into RMB, which began first with intercompany invoices in 2010 and continued on to vendor and sales contracts thereafter. VMware has now completed its first full year of invoicing and receiving payments in CNH/CNY and they have experienced smooth invoicing, efficient revenue recognition and payment remittance with no major collection issues.
We hear many MNCs comment that “we settle in USD, so there’s no exposure for us in China.” This may not really be the case, since most Chinese companies that are accepting USD as a form of payment have already built in a currency component into the contract. By changing the USD invoice to an RMB invoice, MNCs have the immediate ability to more closely monitor and manage the currency exposure. Based on Tina’s presentation, by changing its in-country price list to RMB VMware was able to compete more effectively in China.
“This is the future,” Tina said. “Set yourself up to win by redenominating your trade now. Test it first with intercompany trade and then with one or two trusted Chinese counterparties. You can take it slow, but you are strongly encouraged to begin as soon as possible.”
Becky Liu, Standard Chartered Bank’s Director and Senior Rates Strategies-Hong Kong walked the group through a summary of the macro economic outlook for China and noted that the landscape was “totally different than just one year ago.” Although growth has slowed from the double digits experienced a few years ago, she still predicts stable growth at or around 7 percent. Based on her projections, “there is no fundamental need to weaken RMB, and although we may see some near-term weakness based on USD strength, it is still a strong currency.”
The rapid uptick in the CNH offshore activity has led many treasurers to reevaluate their currency exposures and consider the impacts of RMB redenomination. The RMB is now the fifth most common SWIFT payment currency globally, just behind the Japanese yen. RMB was number 13 just two years ago and is expected to surpass the JPY in the next year or so. It is not too early to implement your RMB strategy.
Based on Standard Chartered Regional Head of RMB Solutions Caroline Owen’s presentation, the very obvious absence of the US from the global map of clearing banks is seen as a political move and does not have an impact on the globalization of the RMB. The world has already endorsed the RMB with or without US support or acceptance. “US MNCs are encouraged to get on board with these changes even if the US decides not to act as a clearing bank. Europe and Asia have plenty of options for clearing banks for US MNCs to effectively manage their global trades,” Caroline said. There are currently 15 global clearing banks with 10 more expected during 2015.
Cross-border lending was another strategy that US roundtable attendees discussed at great length. Many see this as a basic foundation for future liquidity enhancements in China and something that they are moving up on the treasury priority list. There are a few strategies to pick from depending on the needs of the business. The one-way program is a great way to use trapped cash by lending it offshore to an entity that needs cash. The two-way program allows Chinese entities to borrow funds from offshore for working capital purposes without affecting the foreign debt quote.
A major component of any cross-border pooling or lending program is the transfer pricing policy that defines interest rates and other payment details to ensure the structure is treated as ‘arms-length’. The creation of a transfer pricing program was a very in-depth discussion at the roundtable as members reflected on the appropriate arms-length transaction rate that should be used for intercompany activity in light of the limited market rate options available. This is a critical component to the creation of a cross-border lending program, which everyone agreed is an exciting new opportunity in the global liquidity arsenal which allows idle or excess cash to be moved offshore to parties that have a cash need.
In wrapping up our day, attendees agreed that although there are complexities in setting up any new cross-border program, it is important to keep the RMB at the top of their priority list so that they take advantage of the changing regulations and set the stage for more efficient liquidity management for the RMB activity.
On behalf of Standard Chartered Bank and The NeuGroup, we would like to thank those companies who joined us on our US tour. We look forward to wrapping up the series later this year with stops in London and Singapore. Please contact Geri Westphal email@example.com if you are interested in attending the London or Singapore meetings.
The NeuGroup is the leader in peer knowledge exchange and intelligence for treasurers through its iTreasurer publication and The NeuGroup Network of 18 member groups serving more than 350 treasury and finance professionals across functions, industries and global regions.