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Beijing means business with yuan deregulation

More companies, Chinese and foreign alike, are doing business in yuan as Beijing strives to globalize the currency.

NEW DELHI -- Nov. 5 was a pivotal date for many foreign companies doing business in China. On that day, Beijing began allowing qualifying entities to send any amount of yuan to and from their local subsidiaries without having to worry about cross-border capital controls. The move has corporate treasurers cheering and is a reminder of how quickly Beijing is working to make the yuan a major global currency.

     Other changes are happening, as well. Since July 2013, Chinese units of multinationals have been able to transfer their idle yuan funds abroad in the form of intercompany loans. In January, international companies operating in the Shanghai free trade zone were allowed to begin conducting two-way, cross-border cash sweeps. Over the next 10 months, the pilot scheme was expanded to cover the entire country.

Chinese cash flow

According to Sandip Patil, Citigroup's managing director and head of global liquidity and investments for the Asia-Pacific region, China is among the top three markets for most large global companies, and the ability to integrate the country into their global treasury and funding structures is a major advantage.

     The yuan has come a long way since 2004, when it started its transformation from a virtual nonentity in the global markets to a currency of international significance. A three-pronged approach by Chinese regulators to boost its presence in trade, investment and as a reserve currency has been so successful that the yuan is now sometimes referred to as the "redback" -- a play on the U.S. currency's nickname. In a ranking of the most-used global currencies by Swift, a global transaction services organization, the yuan has moved from 20th to seventh in just two years.

     Yuan liberalization began a decade ago when certain companies were allowed to settle trades in yuan and deposit them in Hong Kong in the form of an offshore version of the currency called CNH (as opposed to its onshore counterpart, the CNY). Although the yuan accounts for just 1.6% of the global trade flow today according to Swift, market participants say China is taking rapid steps to make the currency more globally relevant.

     A big step forward was the launch of an offshore yuan bond market in Hong Kong in 2010. Large multinationals like Caterpillar and McDonald's were among the early issuers of these "dim sum bonds," and the market is attractive among international investors who use the instruments to bet on the currency's appreciation. It is also one of the first investment outlets for the burgeoning offshore yuan-deposit base in Hong Kong, which stood at about 944 billion yuan as of October 2014, according to the Hong Kong Monetary Authority.

     German engineering and technology company Siemens last year became one of first multinationals to begin paying suppliers in China in yuan. The company's regional treasury center in Hong Kong now processes over 300,000 cross-border invoices annually for roughly 60 Chinese legal entities.

Risk-reduction tool

"The advent of the yuan as an official trading currency means that all Siemens intragroup companies now have the ability to create a single local-currency price for Chinese customers," said Stefan Harfich, head of Asia-Pacific bank relations for Siemens in Hong Kong. "This can help improve customer relationships and make the sales payment process more efficient."

     Siemens' ability to more freely move its yuan receipts out of mainland China has greatly reduced its foreign exchange risk, according to Harfich. The company no longer needs to convert so much of its yuan to euros and dollars -- the number of its foreign exchange transactions has dropped by 60-70% since October 2013. Siemens keeps most of its yuan in Hong Kong, where its CNH deposits earn better interest than on the mainland and in places where there are more options for hedging against a decline in the Chinese currency.

     "With a fully operational cross-border yuan account integrated into Siemens' global treasury systems, Siemens has a competitive edge that will help it keep pace with China's economic growth long into the future," Harfich said.

     Thanks to the Nov. 5 change, Swiss pharmaceuticals giant Roche has set up a system whereby any excess yuan in its mainland accounts are automatically transferred to interest-bearing accounts in Hong Kong, said Martin Schlageter, head of Roche's treasury operations.

     "This improves group liquidity management and reduces financing costs for Roche," said Schlageter.

     Michelle Price, associate policy and technical director at the Association of Corporate Treasurers in London, said far too few companies are aware of the benefits of trading in yuan. According to Deutsche Bank, only 20.8% of China's trade was settled in yuan in the first three quarters of 2014. The previous year, it was less than 18%.

Not there yet

While many people are optimistic about the yuan's potential to become a major global currency, a recent survey showed that the internationalization push will not always progress smoothly. According to DBS Hong Kong, yuan usage among registered companies in the city fell in the third quarter, with 55% of respondents saying they used the currency for business purposes, down from 69% the previous quarter.

     Given Hong Kong's status as the largest and most liquid offshore yuan center -- 70% of yuan payments and settlements outside of mainland China are made there -- companies in the city have access to a greater range of yuan-funding options. Yet their use of the currency is falling even as China makes it easier to do so.

     Still, the authors of the survey said the drop is likely to be temporary. They blamed a deterioration in China's business climate in the third quarter and a change in exchange-rate expectations. There is a slight discrepancy between the values of the CNY and the CNH against foreign currencies, and Hong Kong traders would much rather settle bills in yuan when the CNH is trading at a premium to the onshore yuan, which was not the case in the third quarter.

     DBS Hong Kong said the yuan will likely continue to grow in international importance as China's capital account is gradually liberalized and more offshore yuan-trading centers are established outside Hong Kong.

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