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HKMA renminbi squaring simplification procedures a positive

04 Apr 2012

The Hong Kong Monetary Authority has streamlined renminbi netting procedures for specific corporations in order to spur the usage of the Chinese currency in cross-border trade settlements.

The Hong Kong Monetary Authority (HKMA) announced on April 2 that it will simplify renminbi position squaring procedures for authorised insitutitons (AIs), which should reduce the amount of red tape during the verification process of their trade settlement in the Chinese currency.

In the case of established customers’ transactions, the ‘know your customer’ (KYC) procedures will be simplified – specific companies that meet the stated criteria would not have to resubmit documents repeatedly for every single cross-border trade transaction, which was required previously.

“That will speed up renminbi-denominated trade invoicing between in Hong Kong and China trade,” said Li-Gang Liu, a Hong Kong-based head of Greater China economics at ANZ to Asiamoney PLUS in a telephone interview on April 3. “As position squaring in Shanghai becomes easier, clients will have greater flexibility in selecting a conversion rate, either [onshore or offshore renminbi], in their favour.”

“Banks will also save unnecessary man hours dealing with the settlement process and will be able to focus on new client acquisition, especially established offshore customers that have already fulfilled the specified KYC status,” he added.

AIs are advised to verify the identity of the customer and gain a thorough understanding of their background and businesses as part of the KYC procedure. Also, AIs should only deal with customers who are able to meet their obligations and operates their business in a lawful and ethical manner.

Towards the end of last year, the HKMA had concerns about some of the trades going through the conversion window, as some may not be in full compliance with regulations, say experts.

As a result, multinational companies (MNCs) have to provide several types of trade documentation, which includes third-party paperwork, as stipulated in a circular released by the HKMA on November 8 in order to satisfy due diligence requirements. This has been dissuading these entities from transacting in the Chinese currency.

Now specific types of corporations are allowed to overcome the extra documentation hurdle as a result of the new guidelines laid out by the HKMA on April 2.

Eligible companies under the new regime must be listed for not less than three years in Hong Kong, China, Taiwan, London, New York, Singapore or other jurisdictions which are a member of the Financial Action Task Force (FATF). The corporate or its subsidiary must also have a business relationship with the AI group – including the AI’s headquarters, branches or subsidiaries whether in or outside Hong Kong – for not less than three years.

“It doesn’t benefit all the companies, but at least it benefits some,” said Thomas Poon, a Hong Kong-based
head of business planning and strategy at HSBC to Asiamoney PLUS in a telephone interview on April 3. “For those companies that meet those criteria and assuming those banks have had done additional due diligence on the companies concerned, then those companies can make use of the channel without the need to provide any supporting documents.”

The FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering, the financing of terrorism and proliferation of weapons of mass destruction.

HSBC believes that this will encourage corporates to use Hong Kong for these types of cross-border trade, which will eventually lead to the increase in demand for onshore renminbi rather than offshore due to ample liquidity for the former.

“Some corporates, especially those MNCs with a lot of sourcing from China may not be comfortable to use or rely exclusively on the CNH market because the volume and the pricing could be a bit volatile at times especially when you have a big order coming in,” shared Poon.

As part of the renminbi trade settlement arrangement introduced by the mainland authorities since July 2009, participating AIs may square their relevant onshore renminbi – or CNY – positions through the Renminbi Clearing Bank in the Shanghai foreign exchange market for conversions conducted with customers for eligible trade transactions.

Bank of China, which is classified as an AI, is the only renminbi clearing bank in Hong Kong.

04 Apr 2012