US businesses can take advantage of China’s growth by using renminbi (RMB) and partnering with an international bank with RMB experience and capabilities. Debra Lodge, a Managing Director for HSBC Global Markets who is responsible for leading Renminbi Business Development in the United States and Canada. Lodge explained to CBR how using RMB can benefit US companies.
Q: China is the world’s largest trading nation and United States’ third-largest export market. Where are the best opportunities for US business and investors in doing business with China?
Lodge: China presents a significant opportunity for US companies and investors. Over the last decade, China has become an important participant in the global financial system and has evolved into an increasingly market driven economy. China’s population of 1.3 billion is becoming increasingly affluent, and while China’s economy is now expanding at a more “normal” pace — 6.9 percent in 2015, despite a slowdown in export growth — it is still one of the fastest-growing major economies in the world.
The recently-adopted 13th Five-Year Plan aims to keep annual GDP growth above 6.5 percent through 2020. This, combined with government initiatives such as the “Belt and Road” regional infrastructure investment push, as well as Chinese corporations’ increasing efforts to expand their operations and capacity beyond mainland China, provide many new opportunities for US businesses and investors.
Additionally, as China’s trade and investment flows continue to increase, the international use of its currency, renminbi, will continue to grow.
Q: How can US companies make the most of China’s growth story?
Lodge: To make the most of China’s growth story, US companies should become familiar with, and consider using, RMB for their business dealings with China. The RMB is a catalyst for providing US businesses with access to China’s growth. As China becomes ever more important to international businesses, RMB internationalization is creating new opportunities in trade, investment, cash management, and funding.
In fact, the RMB is now approaching its final frontier: full convertibility and transformation into a “normal” currency used by companies and individuals worldwide in the same way the US dollar is today.
The RMB is now the second-most-used trade finance currency and among the top five currencies used for global payments. Just December, China began publishing a new index measuring the RMB’s performance against a basket of trade-weighted currencies, highlighting that it was no longer “pegged” to the dollar. In August 2015, China announced a change to the USD-RMB fixing rate, introducing more market orientation into the exchange-rate mechanism. And on October 1 this year, the RMB will join the IMF’s Special Drawing Rights basket of leading reserve currencies.
Its weight in that basket will be smaller than only those of the dollar and the euro, underlining that, in some respects, the renminbi could be considered one of the world’s top three currencies. However, because US businesses have been slower to adopt the RMB than their international counterparts, those willing to give the currency a try will have a competitive advantage both onshore and in home markets.
Q: Why would a US company choose to use RMB rather than the USD?
Lodge: US companies using RMB can experience numerous benefits by analyzing cashflows, understanding the ever-changing regulations, and using these changes to their benefit. For example, changing inter-company payables (related to goods or services) from USD to RMB can give a company an instant savings, as current market conditions suggest that a US company will receive more RMB than USD offshore, than their wholly owned foreign entity or sales office onshore. Using the local currency could deepen relationships with suppliers, enable a company to reach new suppliers, and, more importantly, result in cost savings as RMB unit prices are reduced and cashflows hedged in the forward market (taking advantage of positive forward points).
Q: And what are some of the major challenges or issues companies face when trading in RMB?
Lodge: RMB internationalization has opened the door to many new opportunities. Importers and exporters routinely seek help in using RMB for the purchase or sale of goods and services, through intercompany loans, investment services, dividends, and cash pooling. Clients have told us that the lack of clarity on local procedures is one of their biggest challenges in accessing China’s markets as a whole. As China works to implement major financial reforms, it can be hard to keep up with the pace of policy changes and regulatory plans.
Q: Recently, Michael R. Bloomberg launched the Working Group on US RMB Trading and Clearing. What are its objectives and how is HSBC involved?
Lodge: The Working Group seeks to establish a framework for US institutions to trade, clear, and settle RMB in the United States, essentially serving as an offshore RMB center. Subject to review by US authorities, such a mechanism can benefit US institutions and other financial market participants through lower direct and indirect transaction costs and increased efficiencies. This in turn can help in the facilitation of their businesses with China and capitalize on the opportunities of RMB internationalization.
Q: Finally, if I’m an executive and I want to start or increase my business with China, what should I look for in an advisor or partner?
Lodge: Understanding the logistics of trading in a foreign currency is very important. Many US companies simply don’t have the back-end systems to accept anything other than US dollars, however, we have clients who are willing to share their accounting expertise with new users of foreign currencies. Working with a bank that has foreign exchange expertise and international account experience is critical. Additionally, companies should look for a partner that has local China expertise.