April Insight - RMB ers are coming: is your company prepared?

Weekly announcements in China underscore the country’s commitment to make the RMB fully convertible.  Within China there are a number of strategic reasons for moving in this direction. These include positioning the RMB to ultimately serve as a reserve currency, promoting exports, reducing the burden on the central bank of holding large amounts of US$ dollars in reserve, and rationalizing capital flows.

The immediate commercial impact of this liberalization may not be apparent at an operational level to a company’s management.  It is critically important to realize that each policy change to loosen control and promote the use of RMB creates new opportunities and challenges in home markets  as well as for multinational companies and SME’s with operations in China.

UnionPay, China’s version of the Plus, has announced that the value of overseas goods and services purchased by Chinese consumers in 2011 was 300 Billion Yuan equivalent to US $ 47.5 billion.  In its media announcement, Union Pay also noted that many Chinese citizens prefer to pay for items in cash when they are travelling, the implication being that total expenditure last year by Chinese abroad was probably significantly higher.   

This emerging consumer demand directed mainly at high end brands and outlet stores will requires a review in relation to how to deploy advertising and branding resources.  Expenditures in the branded luxury product market are maturing into keen interest in offshore real estate and investment grade assets.

The China Securities Regulatory Commission also announced last week that it raised the quota amount for Qualified Foreign Institutional Investors as part of a national commitment to liberalize cross-border capital flows with China.  Intercedent believes that this may force international fund management companies, pension funds and equity funds aiming to compete globally to increase their presence in China.

In parallel with these changes, China is clearly committed to expanding the off-share asset portfolio of its own national security and savings fund, mutual funds and insurance companies. This will ultimately create expanded opportunities for investment banks to make more institutional and retail level sales of shares to the China market in publically-listed companies listed off-shore.

The expanding scope of currency swaps in RMB, the steady expansion of the role of China’s The Export-Import Bank in funding exports and China Development Bank in providing financing to international projects is creating well financed competitors in the CIVETS countries as well as Europe and North America.  

CIVETS is a term coined by the Economist to describe countries with a growing middle class and large populations that are the largest new battleground for multinational players.  Countries under this banner include Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa.  China’s strong financial capacity to offer export financing and international project financing allows companies to finance distribution partners and importers. This will put pressure on North American exporters to get commercial support from their banks or rely further on agencies like EDC and US Exim Bank.

The Wall Street Journal, Reuters and Bloomberg are reporting the changes taking place in China’s foreign exchange system in real time. What is not being understood by governments and companies alike is that although the RMB becoming fully convertible is a positive long term economic policy development, there will be dramatic changes in tactics necessary in the short term if businesses wish to stay competitive.  The changes will require companies competing against Chinese industrial counter-parts off-shore to improve financial terms offered to customers. If this is not possible then companies will have to work harder on customer service and real time inventory distribution to compensate for Chinese competitors that increasingly will be able to offer extended and cheaper financing terms.
 

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