If you’re trading with suppliers in China, taking advantage of the recently unlocked Renminbi (RMB) currency could bring good fortune to your cash flows, profit margins and negotiations with suppliers.
After four decades of spectacular growth, China has become one of the world’s largest economies and a vital link in the global marketplace. This growth has been an invaluable gift for Australian businesses by helping to reduce supply chain costs and beef up international markets.
Doing business with China has not been without its challenges, in particular the complications wrought by a local currency, the RMB, which was restricted from crossing China’s borders. This made currency exchange with China problematic and payment cycles slow.
However, Chinese authorities have begun to introduce significant reforms aimed at taking RMB to the world, and what many Australian businesses may not know is that an unlocked RMB offers potential cost savings, and a chance to build goodwill with Chinese suppliers.
There be dragons
China is Australia’s largest trading partner, totalling more than 23% of Aussie trade but the tightly controlled RMB has meant that Aussie businesses have historically paid Chinese suppliers in US dollars.
Dealing with China involved complicated currency conversions, which exposed Chinese businesses to underpayment if exchange rates shifted between the time of invoicing and actually being paid.
It shouldn’t be a surprise that these potential shortfalls have long been factored into Chinese invoices. What may also surprise Australian companies is this extra padding is estimated at between 5% and 10% of an invoice. That’s a lot of money in anyone’s book.
The people’s currency is on the move
In February 2012, Chinese authorities gave foreign companies access to a fully deliverable “offshore” RMB market in Hong Kong. Since then, trade with China has flourished, with the Reserve Bank of Australia (RBA) estimating that RMB trade flows reached USD$360 billion in 2012.
The importance of Asia to the Australian economy means we have embraced efforts to internationalise the RMB.
In March 2012 the RBA signed a $30 billion currency swap agreement with the Chinese Central Bank, the country’s first swap with a Western economy. This followed the authorisation of AUD and RMB convertibility on the Chinese interbank market in 2011.
The RMB’s newfound freedom offers a number of benefits for Australian importers that have Chinese business partners. Streamlined payment processes lead to potential cost savings, and reduced exposure to currency fluctuation means Chinese suppliers are more likely to reduce margins from invoicing. All of this can add to the importer’s bottom line.
The benefits extend to Chinese beneficiaries as well, with research finding that 36% of Chinese businesses would prefer to be paid in RMB.
Why wouldn’t they, when being paid directly in RMB is faster than a USD payment and involves less paperwork?
In addition, making it easier to do business with you is likely to help strengthen your relationships with Chinese suppliers.
How can you take advantage of these potential benefits?
The flow of RMB into and out of China is now largely unrestricted, however there are a couple of basic rules around sending payments:
1. The transaction needs to be trade related
2. RMB payments can only be paid to corporate beneficiaries (no individuals)
3. The beneficiary must have an RMB account
Once you’ve established the above, ask your supplier to provide a product price in RMB as well as USD. Why I hear you ask? Well, it can pay to compare the cost of a USD invoice against an RMB invoice.
More often than not you’ll find that Chinese suppliers include a margin when pricing their product in USD as they incur the exchange rate risk to convert the Greenback to their local currency. As mentioned earlier, this margin can sometimes be as high as 10%.
There are a couple of process options available when it comes to paying in RMB. Ideally you want an FX provider that can offer you the ability to make an RMB payment online, if you need to make a quick transaction on the Spot market, as well as with the personal support of an FX specialist when you need to factor in currency fluctuation over a period of time.
With the aid of an FX specialist, you can leverage the deliverable forwards market to help protect yourself against adverse RMB fluctuation and manage cash-flow. This provides importers with a vehicle to hedge on-going RMB foreign currency exposures – essentially you are able to purchase a set amount of RMB at the current rate, for payment at a set date in the future.
Seek your good fortune
Businesses are always on the lookout for enhancements to operational processes and cost structures; reviewing long established payment methods is one way businesses can improve their bottom line.
Australian importers that are flexible and savvy in their approach to doing business with China will find themselves well-placed to compete in today’s global marketplace.
Now that Western companies can directly manage the exchange rates that apply to their transactions with China, it pays to review your payment process and start requesting invoices in RMB.
This power can be used to add transparency to cost structures by stripping out foreign exchange fees, negotiate better pricing levels, widen profit margins and speed up settlement cycles. Best of all direct RMB payments can help protect against exchange rate movement, which brings predictability to cash flows and budget forecasting.
Adapting to the ongoing liberalisation of the RMB is especially significant given the growth opportunities that exist for companies doing business with China.
You could build goodwill and supplier loyalty, creating a real opportunity to gain a competitive advantage when trading with the world’s second largest economy.