The Flanders-China Chamber of Commerce (FCCC) and Ebury organized – with the support of Flanders Investment and Trade – a webinar on How to mitigate currency risk when trading with China on September 29, 2021.
Ms Gwenn Sonck, Executive Director of the Flanders-China Chamber of Commerce welcomed the participants to the webinar. For many of our companies travel restrictions to China are the biggest issue now, which is expected to last at least till the middle of next year before we will be able to go back to China. We will keep you informed as soon as we have more information if we can travel earlier to China. Flanders' exports to China in 2020 reached €7.63 billion, growing by 22% compared to 2019. This sharp increase in exports to China was due to the Covid-19 pandemic with a sharp growth in exports of chemical and pharmaceutical products. In the first half of this year, exports reached €3.04 billion, a drop of 20%, returning to the level of 2019. Flanders' imports from China in the first half of this year reached €7.88 billion, an increase of 2.53%. The IMF predicts that China's economic growth will reach 8.1% in 2021, the highest in 10 years. Many international brands consider China their most important growth market taking into account the growing middle class.
According to an annual survey of European companies in China, they maintained profitability, which is similar to a recent survey of American companies in China, of which 70% expected revenue growth in China to outpace their companies world-wide growth for the next three to five years. Many companies are also seeking to secure their supply chains, five times as many are onshoring as offshoring and this also reflects the “in China for China” strategy, coupled with the new strategy of limiting exposure to cross-border risks like tariffs and export controls as onshore supply chains are more resilient. Innovation is one of the reasons the Chamber's members want to be in China and the Chinese market is becoming a global driver for innovation. In a recent survey, 72% of European respondents see Chinese firms as equally or more innovative than European ones. According to a report by the World Intellectual Property Organization, China ranks 12th in the global innovation index of 2021, up two places compared to 2020. European companies also state that they continue to see China as a top or top three-destination for present and future investments.
Mr Kris Mercelis, Country Manager Belgium, Ebury, explained the purpose of the webinar: how payments to and from China work, what the related currency risks are, and how to better manage them. Ebury is an internationally active fintech company, specialized in helping international companies with cash management, foreign exchange hedging, international transactions and short-term financing.
Ms Isabel Ye, Director of China Initiatives, Ebury, introduced the three denominations of the RMB in the foreign exchange market: CNY, CNY non deliverable and CNH. CNY refers to the Chinese currency that is traded locally in mainland China, which excludes Hong Kong and Macao. The CNY's daily rate is fixed by the People's Bank of China (PBOC) and it is only deliverable inside China. In the overseas market, foreign investors can tap into the CNY non deliverable and the CNH. CNY non deliverable is accessible outside China, but settlement needs to be in USD. CNH is the name for the overseas CNY, which is only traded outside China, is free floating, and is deliverable outside China. You can exchange euro into CNH and pay your suppliers in China. Traditionally, most of global trade between China and the West has been done in USD. For suppliers in China this was the most natural thing to do because USD was a strong currency and they were used to work in USD with their counterparts in the West. In 2016 the Chinese yuan became one of the basket currencies of the International Monetary Fund (IMF) and the RMB embarked on the road of internationalization with increasing volatility in the exchange rate. In April 2018 the exchange rate USD/CNY dropped to the lowest level since 2014 at USD1 equalling CNY6.25. Later, in August 2019 when Sino-USD trade tensions almost reached a peak, the exchange rate rose to 7.15. Between the lowest and highest level there is a fluctuation of 14.4%.
Due to the process of internationalization of the RMB, more and more suppliers in China are looking to work in RMB directly with their counterparts in the West. The Chinese authorities have also been pushing more and more companies in China to work in the local currency. In December 2020 the authorities published a notice on further optimizing the cross-border RMB policy. It aimed to simplify the paperwork required by the banks from the suppliers. They were allowed to directly submit electronic documents. More and more buyers in the West are turning to transacting in RMB to prevent suppliers adjusting prices based on how the USD/CNY exchange rate is moving. For European importers it will give them full control to manage their foreign exchange risk and get the highest transparency on the suppliers' base price.
Next, Ms Isabel Ye explained how importers needed to protect themselves against one sided risk. In the beginning of 2020, the exchange rate USD/CNY was 6.97, but suppliers were budgeting most likely at 6.80, giving them an additional margin coming from USD appreciation. The peak of the exchange rate was on May 26 at 7.17, giving an extra benefit to the suppliers. Did the suppliers talk about reducing their prices? No. But the buyers were also happy because the prices were stable. In the second half of 2020, the RMB was strengthening to 6.75 on September 15, which was lower than the suppliers' budgeted rate, so now they have a problem as the situation is reversed and they are receiving less than expected. Suppliers are now asking for an increase in their unit prices. This is called one sided risk: when the rates are favorable to the suppliers the clients don't get to share in the profit but when the situation reverses, the supplier is suffering losses and shares the loss with the buyer. It is better for buyers to pay directly in the local currency of the supplier so they can fully manage the exchange rate.
Chinese suppliers are increasingly open to receive RMB, but there are also a few factors to consider. The main reason for suppliers to accept RMB is hedging capability, because most suppliers have limited access to hedging from local banks. They would need to have a credit line from their bank to borrow and do hedging. Depending on where suppliers are based they are more or less exposed and more open to RMB payment from overseas clients, such as those in major exports hubs Zhejiang and Guangdong. Suppliers who source much from abroad prefer USD.
Some issues from Chinese suppliers are:
1. Will the suppliers lose their tax refund if being paid in RMB? Clients will be paying in RMB from outside China and cross-border RMB is also eligible for VAT rebate.
2. The banks ask for a lot of paperwork to receive RMB? Suppliers are able to submit documentation electronically effective since February with the new PBOC RMB guideline.
3. Suppliers would receive RMB in their offshore account in Hong Kong and there are some issues sending the funds to mainland China? Ebury is offering a unique solution – the parallel forward – to protect against the risk of volatile RMB whilst settling payments in USD.
What is the situation for exporters wanting to sell into China? How can they receive money from China? There are strict capital controls in mainland China, which only allow for the movement of funds in certain situations. For businesses it is allowed to transfer funds abroad without restrictions for cross-border trade of goods and services, overseas education and overseas conferences. Outside these categories special permission from the State Administration of Foreign Exchange (SAFE) is required. At the personal level, each person has a foreign quota of USD50,000 or equivalent per year which can be used for travel, education or shopping. But an investor in China looking to buy a property abroad will need to file an application with the regulator as this is not an authorized category. A Chinese subsidiary of a foreign company sending profits back to the parent company will also need to file an application.
How can Ebury help you?
Importing from China: suppliers' liaison services to help in the communication with suppliers, including price negotiations; conversion of euro into CNH at current spot rates or hedging up to five years; and conversion of CNH into euro or other currencies at current spot rates or hedging.
Exporting to China? Ebury can offer a client-named CNH account in Hong Kong. Sellers can receive cross-border CNH in the account, convert it into euro and have it credited to their bank account in the same day. Hong Kong is part of China but from a payment perspective, it is still a cross-border payment subject to the already mentioned restrictions. Ebury can also provide conversion of CNH into euro or other currencies at current spot rates or hedging.
Mr Hendrick Geerits, Kwimex Trading Co, explained that Kwimex is doing imports from China since 1999 and also a little export. Its business partners are mostly distributors, production companies who want to buy spare parts, and partners selling through the internet. About 95% of the company's business is imports and only 5% is exports. Kwimex's added value includes sourcing and relation management with suppliers in China; inspection of products before shipment based on the international standard ISO2859; logistical and legal arrangements for all the orders; import responsibility including compliance with laws and regulations; and financial and currency management.
Kwimex's currency management is part of total risk management. In the years 2000 to 2005, the CNY/USD rate was fixed at 8.27, but from 2005 to 2015 the Chinese renminbi rate became stronger and stronger. After 2019 the rate changed in both directions. Invoices are still in USD and customers take the risk in USD. In 2019 the company only bought in USD and also mainly sold in USD. This way the customers took the risk, or covered their purchasing USD volumes with bank hedge contracts. Kwimex is now doing the currency business with Ebury. We need to convince our Chinese suppliers that they can accept our CNY without losing the tax refund and therefore use Ebury's tax refund guide. About 50% of Kwimex's suppliers now make CNY sales contracts. The company's bookkeeping also had to change to CNY. Hedging is now applied to every CNY payment. Customers are positively surprised now that we make the invoices in euro and Chinese suppliers normally can offer better prices. We also save because Ebury's transactions costs are lower than those of the traditional banks. Kwimex wants to fully go for euro-CNY business without using the USD anymore.
Q&A: Some suppliers want USD because they get subsidies from the Chinese government based on USD inflows. Ms Isabel Ye: All local authorities have an export quota counted in USD. If they receive RMB it will be impossible to distinguish between the RMB generated in China and cross-border. In this case Ebury can use the parallel forward product to pay them in USD equivalent. Mr Kris Mercelis: I will give some more information on Ebury. It is an electronic payment institution regulated by the National Bank of Belgium. Payment institutions are obliged to put all client money in a specific, separate, segregated and safeguarded account. Concerning hedging, we don't take risks ourselves but aggregate all the client flows and go to our own liquidity providers.
