Building RMB into treasury is ‘inevitable’: J.P. Morgan
Incorporating the renminbi into a corporate’s regional and global processes is unavoidable in the long-run, especially as China continues to drive the usage of the currency in trade, says the bank.
Treasurers should be prepared to embrace the renminbi given that the currency is rapidly gaining prominence in the global trading sphere.
With renminbi internationalisation maintaining its momentum and the opportunities for companies inherent to the scheme, building the currency into their regional and global processes seems inevitable for treasurers. Waiting until as vendors or customers are settling their trades in renminbi, could be a step too late for treasurers, according to J.P. Morgan in a note put out on April 12.
“As a treasurer, preparedness is key,” said Ann Lin Khoo, senior product manager for the global renminbi clearing team, treasury services at J.P. Morgan. “In short, now is the time to review preparedness for invoicing in renminbi. It pays for treasurers to be prepared and start leveraging opportunities for process and pricing improvements from settlement in renminbi.”
There are, however, some key considerations for companies in evaluation their position and preparedness, says the bank. For example, a corporate treasurer should evaluate the value and frequency of flows with China as well as determine ideal renminbi account location.
“Significant trade flows with China will determine if a renminbi account is required or if settlement can be managed reactively,” said Khoo. “One consideration [for the account location] would bea treasurer’sstrategic intent with regard to centralisation of currency accounts – in which case, a fungible location like Singapore, Hong Kong or London may fit the bill. “
“Another is proximity – is the treasurer’s priority setting-up within easy access of regional treasury staff for optimal client service support? A third key consideration is funding -- how does the treasurer plan to fund renminbi payments? Would the location make economic sense in securing funding to support trade transactions?” she added.
Unless corporations are reviewing investments into local renminbi products, the establishment of multiple clearing systems should not affect the decision for account locations, notes J.P. Morgan.
In addition, corporate treasurers need to consider their foreign exchange strategy and trade financing needs with regards to the renminbi, adds the bank.
Currently, different forward points applyfor CNH versus CNY contracts, and hedging in China is subject to regulatory and documentation requirements, for example. However, the renminbi internationalisation scheme is offering up options and flexibility for corporations to incorporate the currency into their existing foreign exchange policies and procedures.
Additionally, renminbi letters of credit (LCs) can be issued in the name of the overseas company which can effectively improve return on equity.
Upon incorporating the renminbi into the corporate’s processes, the business then needs to promote its ability to receive and pay in the currency.
“Communication to trading partners and internal procurement and sales functions to ensure that the right dialogues take place and flows can be managed appropriately from programme initiation is a critical, but often missed best practice,” said Khoo.
China policymakers have in the last couple of years, continually simplified policies and processes to ease the way for global corporations conducting business with China.
There has been substantial reduction in requirements for trade documents including the bill of lading and invoicing to support renminbi receipts and payments, for example. A few key benefits for overseas corporations have resulted.
Treasurers can now have more accurate cash flow forecasts with the closing of the gap between when funds are assessed and when they are released by Chinese corporations. Previous challenges where payment for a 180-day invoice could only be received on the 190th day for one payment; and on the 195th day for the next, made it difficult for treasurers to manage cash flows. With changes however, forecasts can be more accurate and improved cash management practices applied, highlights J.P. Morgan.