Sunday, 28 December 2008
Buying Made-in-China? Pay RMB, Please
RMB settlement for goods trade in some areas is being promoted by the government and supporting measures are being formulated. Supervisory departments are planning pilot programs and have recently discussed supporting measures for limited RMB free exchange on a small scale in some areas.
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Buying Made-in-China? Pay RMB, Please
CSC staff
27 December 2008
RMB settlement for goods trade in some areas is being promoted by the government and supporting measures are being formulated. Supervisory departments are planning pilot programs and have recently discussed supporting measures for limited RMB free exchange on a small scale in some areas.
China’s government cabinet, the State Council, is pushing RMB settlement pilots in the trade between Guangdong and the Yangtze River Delta with Hong Kong and Macao, and between Gaungxi and Yunnan Provinces with ASEAN.
Detailed polices will be formulated under the leadership of the People’s Bank of China (PBoC), China’s central bank. Officials in relevant departments and the State Administration of Foreign Exchange (SAFE) are discussing supporting measures.
SAFE will first set up a RMB trade settlement pilot for the Yangtze, Guangdong/Hong Kong, Macao trade, and allow domestic and overseas participant banks to provide trade financing to overseas companies. Banks in Hong Kong will be allowed to borrow RMB from a clearing bank. SAFE is in charge of considering relevant risks.
Provinces and cities involved in frontier trade were summoned by SAFE to attend a meeting on RMB settlement held in Fangchenggang, Guangxi Province, in which the China-Vietnam trade is most active.
The government has recently promised to support Hong Kong’s financial stability and economic development and allow qualified Hong Kong companies to settle trade with RMB. It also agreed on a currency exchange agreement between PBoC and the Hong Kong Monetary Authority to provide financial support if necessary.
China has signed an agreement on free choice of bilateral trade settlement currency with eight neighboring trading partners. SAFE has allowed foreign trade organizations to open RMB settlement accounts especially for RMB frontier trade in areas with intensive RMB business.
In the past, RMB settlement mainly occurred in frontier trade in Yunnan, Heilongjiang, and Xinjiang, mainly in the form of cash deals. For example, a merchant from Burma selling goods to a company in Yunnan can regularly take the cash it gains from the deal to China for settlement.
A financial director of a large import and export company in Zhejiang Province in east central China supports the pilot for RMB settlement, and expects more detailed policies and information. “Details haven’t been released so I have no idea what charge off is involved. Maybe there won’t be the concept of charge off with RMB settlement.”
Banking industry insiders believe this RMB settlement pilot under commodity accounts covers more areas and banks won’t have many technical obstacles.
But a PBoC analyst said this problem in fact involves many areas such as management of current account, charge off, settlement of payment, and management of declaration of international payment.
Another key problem is how foreign companies can get sufficient RMB funding. If bilateral trade should be settled in RMB, a prerequisite is that foreign companies have enough RMB, but how to get it? Will they continue to use small amounts of cash as they have in the past, or will they be able to change their own currency into RMB through the foreign exchange market? This depends on whether the Chinese government allows free RMB exchange in relevant areas.
Now most foreign companies get RMB funds mainly from the trade financing service of domestic banks, but these funds are still short and they are usually holding foreign exchange, so there’s exchange rate risk when they return money to banks.
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