My thoughts on Reminbi as a currency for settlement of international trades

I recently came across  a Chinese corporation which intended to purchase certain canmaking machines and parts from US  manufacturers for a sum of around US$300,000. The Chinese buyer made it a condition that the payment was to be made in Renminbi (RMB), the Chinese currency.

There is an increasing trend that the Chinese want to settle their foreign purchases by RMB. It seems there is a certain agenda, among the Chinese corporations, to do so in line with the country’s policy to become less relied on the US dollar.  It is a well known fact that China is the largest foreign holder of US government treasuries and bonds. The holdings are continuing to grow despite China from time to time voiced its concern over the safety of its US assets. The irony is that the Hong Kong dollars were and is pegged to the US dollar. Since 1983, the Hong Kong dollar exchange rate has been held to one US dollar to 7.8 Hong Kong dollar, with minimal fluctuations. The Hong Kong government holds that this linked exchange policy will not be changed whatsoever. It indicates that Hong Kong has great confidence in the US dollar. I think there is something that Hong Kong knows, which China does not, or vice versa.

It is not surprising that China wants its currency to play a bigger role in international trades as it is the largest exporter in the world and one of the largest importers in the world. The problem is that the there are a lot of rules and regulation governing the remittance of RMB into and out of the country.

In passing, I would like to mention one of my recent bad experiences in dealing with RMB. In the beginning of this year, one of my US clients intended to purchase certain steel pipes from China. The relevant contract was signed between the parties and the US buyer remitted a certain sum of deposit to the Chinese supplier in US dollar.  However, the Chinese local bank refused to convert the dollars into RMB as the local company did not have a US dollar account. In order for it to receive the RMB it had to attain the status of a foreign trading corporation, which required the approval of China Foreign Exchange Bureau. At the same time the US supplier could not arrange to remit RMB to China as RMB was not available at its US bank. At the end of the day, the deal was called off and the deposit was returned to the US supplier. As can be seen what appeared to be a simple transaction could be  made complicated or impossible due to the lack of understanding of the China currency situations.

Returning to the subject on RMB as a settlement currency, personally, I do not mind receiving payments in RMB as the currency  is one of the strongest in the world and with the country’s prevailing strong economy and as a primarily exporting country, RMB is likely to continue to be strong. Further, in Hong Kong,  there are a lot of channels to do the RMB exchanges. It is so only because Hong Kong has a strong pool of RMB and a close tie with China.  There is an available market, in Hong Kong,  for the buying and selling of RMB. As I said before there are many rules and regulations with regard to the exchanges of RMB into other currencies. It is difficult for foreign companies to understand or to take the risk

With a view to solving these issues, at end of June 2009, the monetary authorities of China and Hong Kong signed a pact, which came into force on 1st July 2009, to make Hong Kong officially (my comments added) the first RMB exchange centre outside China. Under the pact companies in Hong Kong are allowed to settle trades with their China counterparts in RMB in five major China cities, namely, Shenzhen, Guangzhou, Zhuhai, Dongguan and Shanghai. It should be mentioned only a number of authorised companies within those five cities are allowed to engage in such deals. It is clear only a handful of foreign companies will be benefited. Although it is meant to be a test scheme, there is no time schedule for extending the scheme to other cities.

In the meantime, I think foreign corporations will likely see their China counterparts to press for paying their purchases in RMB. Yet it would be a long time before RMB could turn into a freely convertible currencies. It is a lesser problem if a foreign corporation has  manufacturing facilities in China as it could use the RMB received to meet expenses of its local operations. As for a foreign company engaging in one way trade, it will have to find solutions as to how to repatriate their moneys back home.