The PRC government has expanded the use of the renminbi (RMB) for cross-border trade settlement, presenting new opportunities for financing trade in China and cost savings for those who buy from or sell to participating Chinese enterprises. The State Council and the People’s Bank of China (PBOC) recently issued regulations to expand the 2009 RMB cross-border trade settlement pilot program to allow more geographic areas and enterprises to participate, furthering international use of the RMB. The PRC government has long expressed interest in making the RMB an international currency to benefit Chinese exporters and develop China’s major cities—particularly Shanghai and Hong Kong— into global finance centers.

PRC government expands RMB cross-border trade settlement

The State Council’s July 2009 Administrative Measures on Pilot Projects for RMB Cross-Border Trade Settlement marked the beginning of the program to make the RMB convertible outside of China by allowing eligible companies in seven provinces to settle trade debt in RMB with Hong Kong, Macao, and the 10 countries of the Association of Southeast Asian Nations. The pilot program helped companies better manage risk associated with exchange rate fluctuations and decrease settlement costs.

PBOC, the Ministry of Finance, and the Ministry of Commerce in June 2010 released a notice to expand the original pilot program. The Notice on Issues of Expanding Pilot Programs for RMB Cross-Border Trade Settlement:

  • Extends RMB cross-border trade settlement privileges to include transactions with all of China’s trading partners;
  • Allows eligible enterprises in 20 provinces and cities, including Beijing, Tianjin, Jiangsu, Sichuan, and Zhejiang, to pay for their merchandise imports, services trade, and other current account transactions in RMB; and
  • Allows eligible enterprises in 16 of the 20 provinces and cities to accept payments in RMB for their exported goods.

To participate in the program, enterprises must be nominated by one of the 20 participating provincial governments. Foreign companies are eligible and should contact their provincial government to apply. Enterprises in eight border provinces—Guangxi, Heilongjiang, Inner Mongolia, Jilin, Liaoning, Tibet, Xinjiang, and Yunnan—that have import or export rights can accept RMB payments for trade with neighboring countries without nomination from the relevant provincial government. In a separate agreement, PBOC and the Bank of China-Hong Kong removed all restrictions on banks in Hong Kong (including foreign banks) that wish to create RMB accounts for customers. The agreement also allowed individuals and corporations to send international RMB payments and transfers through those banks.

RMB bond market investments

Regulations passed in recent months allow foreign financial institutions to offer new settlement services and reduce transaction costs for importers and exporters. In August, PBOC began allowing approved foreign financial institutions to invest RMB holdings in the Chinese interbank bond market. Further, foreign banks may apply to conduct trading in the interbank bond market using RMB funds gained from the handling of international RMB trade settlement. The notice allows banks to easily invest the RMB assets they hold as a result of the new trading rules.

The expanded RMB cross-border trade settlement program allows banks and financial institutions operating in China to expand their services into RMB trade settlement. Companies such as Allied Wallet Ltd.; Bank of East Asia, Ltd.; HSBC Holdings plc; JPMorgan Chase & Co.; and Standard Chartered Bank have already expressed their intent to offer RMB trade settlement services and participate in the interbank bond market. In addition, companies in the expanded pilot areas that import to or export from China will see reduced transaction costs as the need to hedge against foreign currency risks diminishes.

[author] Nina Palmer is a research assistant at the US-China Business Council (USCBC) in Washington, DC. This article is adapted from a report that first appeared in China Market Intelligence, USCBC’s members-only newsletter. To find out more about USCBC member company benefits, see [/author]

Posted by Nina Palmer