WHILE many large multinational companies have enjoyed great success doing business with China, the aspiring European middle-market has not always enjoyed such smooth sailing. Without the contacts, resources and treasury set-up of their larger counterparts, the middle-market has struggled to tackle constantly changing Chinese regulation and the complex nature of settling and invoicing in the local currency, the renminbi (RMB). However, thanks to key developments over the last 12 months – brought about by the RMB’s ongoing internationalisation – this is now changing, making China more cash-management friendly for financial directors, and, as such, a viable growth market for Europe’s middle market.
Currently, the most important developments for middle-market companies looking to expand into China are twofold. The first is the establishment of offshore clearing hubs in Europe, enabling easier settlement and invoicing in RMB. In November 2014, Frankfurt will become the first official RMB clearing centre in the eurozone. The second relates to the fact that China has recently loosened its currency controls, enabling companies to send onshore liquidity more easily out of China.
The key for middle-market companies however is not only keeping abreast of the rapidly changing financial environment, but also positioning themselves in order that they can make the most of the opportunities this presents.
Clearing hubs in Europe
The wave of European offshore clearing hubs is particularly significant for the middle-market, principally because it allows them to settle transactions in RMB directly via their local market. By adopting the RMB as a trade settlement currency, China becomes a significantly easier place to do business: cost of goods is likely to fall (Chinese companies often price-in their RMB to dollar conversion), and transaction processes are made simpler. What is more, the ability to offer this option to Chinese counterparties is likely to help middle-market companies gain a competitive edge in China and strengthen business relationships.
Settling RMB business in the local time zone is also advantageous because mid-market companies can actively manage their FX risk and cash management through their local banking partner that speaks their own language and is more likely to be familiar with their business. In addition, corporates have a greater ability to manage their FX risk through the offshore market. This is because an offshore account provides the most options for hedging currency risk, with a broad range of currency instruments available. Local RMB clearing also enables middle-market companies to benefit from more attractive cut-off times for payment transactions within the same time zone.
But a local hub is not simply a matter of time-zone convenience. Establishing clearing hubs in key European cities means that international financial directors no longer need a long arm into China for their RMB business and they can take control from their European office, rendering the payment chain more transparent. Given that a full range of global banking services is available to help companies manage the RMB as they would any other currency, switching to settling in RMB should no longer be a challenge.
Releasing trapped cash
Naturally, not all trade will be able to be settled via an offshore clearing hub, which is why the latest relaxation of Chinese currency controls, allowing corporates to unlock their trapped onshore cash, is significant.
Indeed, over the last six to nine months, currency and liquidity restrictions have become less onerous. For example, from an FX perspective, RMB can now be traded directly against the EUR rather than via USD, which reduces costs and improves transparency. Since the RMB trading band was widened in March 2014, volatility has increased and it has become both easier and necessary to manage currency risk.
And opportunities are also emerging from a cash and liquidity management perspective. For example, while RMB held offshore can be included in multi-currency cash pools, onshore RMB can now be included in cash pools, while regulatory approval for cross-border intercompany loans and dividends has been further relaxed.
Although not quite yet a viable currency for global cash management, the increasing speed of the RMB’s liberalisation demonstrates the need for corporates to regularly review their treasury-setup.
China opening up
While many hurdles still remain, the opportunity to handle FX risks and invoice directly in RMB through a local banking partner in Europe is now making China more accessible for middle market corporates.
Yet in order to make the most of these new opportunities, mid-market companies need to have the latest information on the RMB’s rapid liberalisation and what it means for their business. Here, the expertise of a banking partner that not only has a local presence in their domestic market -and can reduce the complexity of their currency risk management – but also one that has a strong presence onshore in China, is essential. Certainly, China’s complexity means that keeping on top of the rapidly-changing market is impossible without this relationship.
With China’s growth forecast to overtake the US this year, European mid-market exporters should certainly be considering China in their strategic growth plans and seeking the advice of their local bank to inform themselves on the latest developments in the RMB’s internationalisation.
Frank-Oliver Wolf is global head of cash management & international dusiness, corporate banking at Commerzbank. Martin Keller is European head of interest, currency & liquidity management, corporate banking at Commerzbank