Supply Chain

Barrier to Trade in Chinese Currency Falls

But U.S. companies are still somewhat ambivalent about transacting in the renminbi.
Vincent RyanJune 15, 2012

The People’s Bank of China (PBOC) took more steps this week to accelerate the adoption of China’s currency for cross-border trade settlement.

On Monday the PBOC released a “black list” of about 9,000 Chinese companies that will be strictly supervised when they try to settle overseas trades in renminbi (or yuan), including transactions with U.S. businesses. Not having the list kept banks in China from implementing Beijing’s new policy allowing all domestic companies to invoice and pay international trading partners in renminbi. That policy was announced in February.

“Now there is no reason why any bank in China would prohibit any type of funds from crossing borders in renminbi,” says Alfred Nader, vice president of corporate strategy at payments provider Western Union Business Solutions.

In addition, on Thursday The Wall Street Journal reported that the PBOC is testing a new scheme in Shanghai that would make it even easier for Chinese companies to pay and invoice in renminbi. The scheme eliminates the requirement that companies show their banks documents verifying the purpose of the cross-border transaction. While there has been no official announcement about the test, if eventually adopted nationwide it could further speed up the use of the currency worldwide.

“It seems like every month the PBOC is doing something; they are on a breakneck pace to internationalize the currency,” says Nader.

China first allowed cross-border trade to be invoiced and paid in renminbi three years ago, but it was limited to a list of about 67,000 companies dubbed “mainland designated enterprises.” An importer outside China, therefore, had to first check that its Chinese trading partner was on the list. “The list was only available in Chinese, and that didn’t make it easy,” Nader says. But then the PBOC opened the program to all 10 million or so domestic companies earlier this year.

But while banks in Hong Kong and London, and their governments, have embraced the opportunity to become renminbi trading centers, there is hesitancy in the United States. The overwhelming majority of U.S. importers and exporters are still being invoiced and making payments in U.S. dollars, a decades-long practice.

“Are American companies willing to receive payment in the renminbi? That’s a big question,” says Nader. Chinese companies have less paperwork and receive funds more quickly when they invoice in renminbi. (They also receive an export-tax rebate faster.) But the Chinese, mostly due to cultural differences, usually wait for their U.S. trading partner to initiate discussions concerning transacting in renminbi, Nader says.

And U.S. companies don’t seem highly motivated to do so, despite the fact that Chinese exporters on average add 3% to a U.S. dollar invoice to hedge against renminbi appreciation. The Chinese government says it has had trouble promoting the policy change outside China. But there may also be some “willful ignorance” on the part of U.S. companies, says Nader. “When they receive invoices in the U.S. dollar, they don’t have to worry about exchange-rate fluctuations,” he points out.

In addition, in the short term U.S. exporters may find being paid in renminbi unattractive, since the Chinese currency has weakened against the dollar this year. But that’s a definite break from the pattern of the past two years, when the renminbi rose as Beijing widened the currency’s trading band. However, “right now we’re in unprecedented waters” in the financial markets, says Nader, and he believes the weakening in the renminbi won’t last.