Chinese firms need to use yuan more

By Michael Vrontamitis | February 17, 2014, Monday |

Print Edition

In the meteoric rise of the yuan as a global currency, if 2012 was the year of the “Why,” then 2013 was the year of the “How,” as global corporates embraced the Chinese currency in earnest..

This year, the spotlight is on local Chinese corporates which - surprisingly perhaps to some - are lagging behind their international counterparts when it comes to switching to the yuan.

With the yuan entering the Top 10 list of global payment currencies for the first time last year, offshore multinationals no longer need persuasion to include it in their basket of currencies.

As, one by one, regulatory restrictions have been lifted, and offshore liquidity has deepened, moving the Chinese currency around the world is now nearly as easy as moving the US dollar or the euro. Today, China-based companies can manage their liquidity and working capital on a regional or global basis and multinationals can include China-based accounts in their global solutions.

In its latest move to open up capital flows with the rest of the world, the Chinese government has said companies based in the country can send dividends and loans to their offshore units without lengthy approvals. This makes Chinese corporate debt more attractive, as it assures investors that funds can be transferred quickly to bond-issuing offshore entities that run into financial difficulty.

Yuan invoicing

The gradual liberalization of foreign exchange in China, resulting in greater volatility in the onshore yuan, has added to the argument for China-based corporates to switch from US dollar to yuan invoicing, in order to reduce their foreign exchange exposure in China. A number of multinationals have already made the move to yuan invoicing with China, shifting their foreign exchange exposure from onshore to offshore.

Growth in the yuan as an international trading currency has been rapid so far, with redenomination set to reach 15 per cent of China’s trade by 2015. This will be driven by business fundamentals, as corporates switch to the yuan in order to gain more control of their foreign exchange risk, save on cost and build their competitive advantage.

However, a mindset change among local companies in China is the crucial next step if the yuan is going to reach the redenomination rate of 30 percent of China’s trade that many predict by 2020 — a doubling of today’s level.

Raising awareness among these companies about the benefits of switching to yuan invoicing will be the big focus point for 2014. Chinese corporates need to examine the underlying input cost of their entire supply chain and ask themselves whether settling exclusively in US dollar remains the most efficient option. For a growing number, the answer is likely to be “No.”

The projected rise in onshore sales, as Chinese domestic consumption grows, should be a factor in these considerations, and will likely help persuade more local companies to make the move into the yuan. With trade between China and the rest of Asia growing, and deregulation continuing, the argument will build further for settling more trade in the yuan as opposed to the US dollar.

Shift in thinking

Sooner or later, local Chinese corporates will have to adapt their treasury management processes to make the most of the new reality. At the practical level, switching to settling in the yuan should pose no difficulty for these companies, as a full complement of global banking services now exists to help businesses manage the yuan as they would do with any other currency.

What remains is a shift in thinking, away from the US dollar-denominated overseas trading that Chinese mainland corporates have been accustomed to since the early 1990s, and this is likely to take time. There is a role for both banks and Chinese regulators in educating these corporates, and encouraging them to consider the potential benefits of switching to the yuan.

We believe the yuan is likely to become the world’s fourth most used trading currency by 2020 — behind the US dollar, the euro and the British pound — but this won’t happen automatically.

To reach its full potential as a global trading currency, the yuan will need to pass a series of tipping points.

Further out, focus is likely to shift to the settlement of commodities trading — particularly oil trading — but this year attention needs to be firmly on Chinese mainland corporates. Their actions will be crucial in propelling the yuan into its next big phase of internationalization.

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