People’s Bank of China (PBoC) has reassured users of the renminbi that it will continue to promote capital account convertibility via the simplification of cross-border settlement rules.
The notification broadly covers five major areas including renminbi cross-border settlement under the current account, onshore non-financial institution outbound renminbi lending and issuance of offshore renminbi-denominated bonds.
Specifically, there are several eye-catching liberalisations, note market participants. For example, for renminbi cross-border transactions under the current account, banks can process funds that need to be booked and verify the trade documents later. This exercise is part of China’s ‘Simplified Documentation Checking’ pilot initiative, which has now been expanded across the nation.
“The notification announced today reiterates the need for banks to strictly observe regulatory requirements on cross border trade settlements,” said Li-Gang Liu, Greater China chief economist at ANZ in a report on July 10. “However, it simplifies the administrative procedures and allows onshore banks to book the position before document verification. By offering such an operational guideline, this will reduce the red tape facing many corporates who are engaged in genuine renminbi cross-border trade settlement.”
Another noteworthy development allows onshore non-financial institutions to lend the Chinese currency to offshore intra-group companies or affiliated companies through a pooling scheme.
Although this cross-border renminbi intercompany lending programme was launched back in November, this initiative has also been expanded to the whole of China. However, corporates are still required to submit applications through banks and provincial PBoC offices for the quota.
“This is broadly because the pilot scheme has been running so successfully and PBoC believes that it’s the right time to bring it to the mainstream.,” said Frankie Au, director for product management, transaction banking at Standard Chartered to Asiamoney PLUS on July 11. “It offers corporates flexibility and it’s also part of the regulator’s intention to make the renminbi much simpler to use compared to foreign currencies.”
Application process for the intercompany loan also has been standardised across each different city, adds Au.
Apart from the simplification of trade documents and the extension of the renminbi intercompany loan across China, onshore agency banks’ renminbi account financing to offshore participating banks are now extended to one year as opposed to three months.
Onshore and offshore banks can now remit the funds across the border more easily, says ANZ.
“Previously, offshore banks only earned a little interest on their nostro accounts in the offshore clearing bank,” said Liu. “From a macro perspective, this liberalisation may facilitate the convergence of the onshore and offshore interest rates.”
A nostro account is a bank account held in a foreign country by a domestic bank, denominated in the currency of that country, in this case is the offshore renminbi. These accounts are used to facilitate settlement of foreign exchange and trade transactions.