Turning to renminbi as treasury currency

“Turning to renminbi as treasury currency” published in “The Asset” in April 2014. Interview with
Stefan Harfich, Head of bank relations APAC at Siemens' regional treasury center in Hong Kong.
Cover story
Turning to renminbi as
treasury currency
Corporates take steps to gain from the renminbi’s internationalization
By Gita Dhungana
W
hen China set out on
its journey to internationalize the renminbi
in 2009, with regulators allowing the use of the currency for
cross-border trade settlement,
the market reaction was mixed.
There was excitement because
of the opportunities it presented for corporates and banks,
but there was also scepticism
amid the uncertainty about the
pace and extent of the liberalization process.
But as things have evolved
in the last five years, with China
gradually relaxing the rules, liberalizing the country’s capital
and current accounts and helping create a liquid offshore market, many sceptics have turned
into believers.
Corporates have changed their attitude from curiosity to action. They are
now exploring the many ways they can
transact in renminbi, how their treasury
function can manage the Chinese currency much better, and how they can use
their surplus cash in China to support
their global operation.
“In the past, there was a lot of scepticism around how easy this currency can be
used and the challenges of embedding this
currency into business operations,” says
Carmen Ling, global head of renminbi
solutions, corporate and institutional clients at Standard Chartered. “With recent
regulations and relaxations, it is getting
easier to use the renminbi for cross-border settlements as well as to include it into
the global or regional liquidity treasury
Along with its rise as an economic power
and shift towards a market economy,
China is avidly pursuing the goal of making
the renminbi as widely used as the US
dollar, and is steadily removing its controls
on the currency. The path to renminbi’s
internationalization could be traced back to
2005 when its peg to the greenback was
removed, but it was only in 2009, when its
use for cross-border trade settlement was
first allowed, that the country began to
pursue in earnest the goal of making it a
freely convertible currency. As the journey
continues, more and more multinational
corporations are seeing value in adding
renminbi as one of their treasury currencies
for payments and liquidity management
management basket, and we do see a lot of
interest and commitment from corporates
in exploring how they can re-invoice or
re-denominate the flows into renminbi to
reap the benefits of internationalization.”
Among them is Shell Group, which
is planning to promote the use of the
renminbi not only for units and partners
registered in China but also for overseas
entities that have relations with China.
“Shell has a strategy of low-cost country sourcing -- it aims to buy from China
such things as pipes and equipment for
capital investment in other countries,”
says Jennifer Zhao Zhongling, head of
treasury managers at Shell (China).
“So we are looking to price and settle these contracts in renminbi where it
contributes to transparency in pricing
APRI 2014
6
and contract sustainability. That
would mean a few Shell entities
outside of China will need to use
renminbi and it is our goal to
satisfy this need by creating the
global infrastructure for the use
of the currency.”
Steadily moving forward
Since 2009, the People’s Bank
of China (PBOC) has stepped
up the renminbi liberalization
process, introducing landmark
policy initiatives including creating multiple offshore clearing centres, allowing crossborder renminbi lending and
simplifying documentation
process for cross-border renminbi settlement.
As of this writing, it has
signed agreements with the central banks of Germany and the
UK on the clearing and settlement of payments in renminbi, making
Frankfurt and London the latest offshore
clearing centres for the currency.
In July 2013, the PBOC allowed
companies to engage in cross-border
renminbi lending from anywhere in
China without the need for approval
from the Chinese central bank. Several
corporates have since seized this channel
as a liquidity management tool, bringing
trapped profits from their Chinese entities offshore.
There is still restriction on the flows
to China, as lending can only be done on
a net basis, which means the amount lent
to onshore Chinese entities cannot exceed
what was initially repatriated offshore.
However, treasurers who have made
use of the July 2013 ruling to move
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Cover
trapped cash out of China, say this has
paved the way for them to realize their
ultimate goal of linking their pool of
liquidity in the country to their central
treasury account.
One of them is Nokia Solutions
Networks, which in August 2013 implemented a quota-based renminbi crossborder lending structure to bring surplus
cash in China to a group account in
Hong Kong.
“The biggest advantage of this solution is that [it provides a test case for us]
in the future,” says Johnny Ho, the company’s head of regional treasury centre for
Greater China and Japan. “What we ultimately want to do is link our cross-border
renminbi account to our global cash pool
so that we can fulfil two-way sweeps.”
The establishment of Shanghai Free
story
sury centre management activities,” says
Yigen Pei, head of transaction services
for China at Citi.
Citi’s clients that already have existing
FTZ entities are the ones interested in
using such entities to connect their China
cash pool to their liquidity pool for the
rest of the world for centralized management of cross-border transactions in the
pilot zone, says Pei. “Some of them are
trading companies and some of them are
warehouse logistics entities. We get a lot
of enquiries and seen a lot of interest from
this client base.”
The Shanghai FTZ, which was established to pilot a broad range of economic
and financial liberalizations in China, had
close to 1,400 registered institutions by
the end of February 2014. Premier Li
Keqiang said in March the government
Trade Zone (FTZ) in September 2013,
along with the release of relevant policy guidelines in December 2013 and
February 2014, has made several crossborder treasury management solutions
such as two-way cash sweeping possible
in the pilot area.
Corporates can now implement treasury practices such as centralized settlement, centralized processing and netting
through an FTZ entity, to increase efficiency and reduce the cost of funding.
However, this does not mean corporates are rushing to set up FTZ entities
in Shanghai simply for treasury centre
management activities.
“While there is a lot of interest from
our clients across the world, we have yet
to see a scenario in which companies
set up an FTZ entity simply for trea-
Siemens: the conversion of a doubting RMB player
The biggest benefit is the transfer of FX risk from China to offshore
S
iemens, Germany’s biggest engineering company, joined the renminbi club
in October 2013 by introducing the currency as an additional unit for crossborder payments and invoicing. But that
decision did not come easily and was the
result of months of market monitoring
and planning.
“When China began its initiatives to
liberalize the renminbi in 2009 through
a pilot project for cross-border invoicing,
we did not initially think this was something that we will look into,” says Stefan
Harfich, who led the global introduction
of renminbi at the Munich-based group.
“For one thing, this was only allowed
to pilot entities in pilot regions that were
approved. Then there was the requirement of having the documentation in
place to convert the renminbi on a one-toone basis, which was absolutely not doable
with the huge number of invoices per year
within our company,” adds Harfich, who
also heads one of the group’s two in-house
treasury teams in Asia-Pacific.
Harfich recalls that the People’s Bank
of China (PBOC) at the time was actively
seeking feedback from corporates, and
Siemens impressed on the Chinese cen-
tral bank the importance of having a
forwards market offshore. “We told them
right from the beginning that without a
forwards market offshore, it would not be
practical for multinational corporations to
implement. Corporates are used to hedging their exposures.”
In 2010, with the creation of an offshore renminbi market (CNH) in Hong
Kong, the renminbi became a deliverable currency in the form of CNH. Even
then, Siemens did not want to jump on
the bandwagon without knowing for
Harfich: No way we could initiate something and suddenly stop the whole boat
APRI 2014
8
sure how the liquidity in the offshore
market would develop.
It is understandable that the group
took a cautious approach, considering
its large-scale operation in China and
the vast amount of cross-border flows
it handles every year. The company
operates more than 50 entities in the
country including some joint ventures
and derives about 10% of its total sales
revenue from this market.
Currently, China-related cross-border flows within the group are much
larger than third-party flows, with well
over 300,000 cross-border invoices handled annually.“There is no way we could
initiate something and suddenly stop the
whole boat. We had to be sure that this
thing will go in the right direction and will
continue like that,” Harfich notes.
Once the daily trading volumes of
CNH products started rising in early
2012, while non-deliverable forwards
(NDF) liquidity was rapidly shrinking,
market participants moved quickly to the
deliverable CNH. That was the point
when Siemens saw the possibility of introducing the renminbi as one of the payment currencies within its system.
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Cover
would be looking to establish similar free
trade zones in other parts of the country.
Complexities remain
While hopeful about the future, treasurers and banks say challenges remain,
both inside and outside their groups, as
they expand the cross-border use of the
renminbi.
“The central government might say
one thing but it is the local government
that really holds the power,” one treasurer
at a regional firm told The Asset. “We have
more than US$800 million of trapped
cash in China, so we wanted to centralize
the cash in Shanghai – which the central
bank says we can – and then have a credit
facility in Singapore linked to that pool.
The structure is in place but the local
governments are blocking it to this day
“We said there is enough liquidity
for us to hedge very large projects, which
easily can involve several hundreds of millions of US dollar equivalent in hedging.”
In June 2012, the company made
the decision to introduce the renminbi
as an additional payment currency with
same status as the US dollar and euro for
cross-border payment. But it was not until
October 2013 that full implementation
was completed at all levels of the treasury
side, as it entailed various challenges that
needed to be ironed out, including several
teach-in sessions across departments. This
was not just a unilateral act by treasury,
but a cross-departmental decision.
“Right from the beginning, we did 40
to 50 internal presentations and meetings
with entities in and outside of China to
educate everyone about the topic,” recalls
Harfich.“We had to communicate internally what we were going to do, how the
operating business will be affected, and
what they might need to change in their
system. The support especially from the
Chinese entities was tremendous, because
it simplifies things in China from a currency perspective quite a bit. But initially
the idea was not very popular especially
among entities outside China.”
Additionally, from a treasury point
of view, managing multiple quotes of the
same currency, such as onshore CNY
versus offshore CNH, created an IT chal-
story
[because they do not want the funds to
leave their jurisdiction]. So, as much as
the talk about the internationalization
of the renminbi and the Shanghai FTZ
tickles me, in reality it won’t work unless
the local governments have less power.”
“We are looking at moving to the
renminbi very much, but we don’t get
the comfort we need yet,” says another
treasurer in a multinational firm. “For
us, there has to be a liquid options
market outside of Europe, because our
in-house banks in Europe and the US
cannot tap Hong Kong easily [due to
time differences]. Liquidity in London
is not yet enough. Second, even today
very few banks run very good FX programmes for renminbi. The spreads for
hedging instruments are very volatile.
These are barriers at the moment, but
lenge initially. Historically, Siemens used
CNY non-deliverable forwards for hedging. But problems arose when CNH had
to be added into the treasury management
system (TMS).
“Our TMS was not able to differentiate two revaluation curves for these two
different markets. Only one curve can
be fed into the TMS for revaluation of a
hedge. Because this TMS also interfaces
with so many other systems, including
for payments and settlement, we could
not simply add CNH as an artificial
currency, because it would have meant
coding a lot of new interfaces. That was
too costly, time-consuming and risky.
Therefore, we decided to terminate all
CNY NDF hedges and rehedged them,
in the same moment, to CNH deliverable forwards. Doing that also meant
obtaining a global waiver from our auditor because this switch could have had
hedge accounting implications on our
profit and loss statement.”
Benefits
The efforts have started yielding results.
After just a few months of operations,
around 6% of transactions at Siemens
in China were transacted in renminbi. “In the first quarter of operation,
invoices were issued in renminbi totalling several hundred million already,
and we are confident it could reach a
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APRI 2014
9
I’m hoping that within 12-15 months
this may change.”
Meanwhile, a European-based firm,
which has significant Asia business, plans
to monitor the market further before
making any move.
In any case, the renminbi’s internationalization agenda is now universally
accepted, and corporates are preparing
to take advantage of the developments in
this respect one way or another.
“We strongly think China will continue with the liberalization of renminbi and
does not want to reverse its liberalization
agenda,” says Stefan Harfich, who steered
the global introduction of renminbi at
Siemens last year. “We need to prepare
our entities for it, which means building
our capability in using the renminbi for
invoicing, payments and hedging.”
billion quickly,” notes Harfich.
The biggest benefit of the introduction of renminbi is the transfer of the
foreign exchange risk from China to offshore. “In the past, the business within
China was denominated in renminbi,
while the supplies from overseas were
denominated in US dollar or euro. Now
having the exposure offshore means that
the entities can net their renminbi exposure, if not at an entity level then at least
at a treasury level,” he adds.
“The treasury centres in the region
can then take care of any remaining exposure in renminbi, where this becomes a
standardized process, e.g., back office, risk
control or accounting. So from a treasury
perspective, this is the major advantage.”
The next step for Siemens is to
link onshore liquidity in China with
the central treasury account. Currently,
due to its set-up in China with a specific treasury entity, Siemens does not
do cross-border intra-company loans to
take surplus cash out of China.
The company is waiting until cash
pooling structures and automated sweeping, potentially zero balancing sweeping
structure, across the border are available,
to move liquidity anytime to one central
account. “This has been made possible
recently at the Shanghai Free Trade
Zone, which we are currently evaluating,” he says.

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