28 August 2015

Overcome the RMB Knowledge Gap with HSBC

Doing business in China today can seem daunting, especially if you are new to Renminbi currency transactions. However, you can leverage HSBC's experience and network in China to help overcome some of the challenges of this market.

Trading with China is easier than it once was, but the perception remains that an abundance of regulation adds unwanted complexity. Some Canadian companies may be wary of venturing into the market, and the recent ability to now deal in Chinese Renminbi (RMB) – while positive in many ways – has added new concerns.

While there are challenges, the source is not regulatory, but rather a "knowledge deficit" at both Canadian firms and their Chinese counterparts when it comes to RMB transactions. With the institutional relationships and geographic reach that HSBC enjoys in China, HSBC can be the supportive advisor you need to overcome this gap.

The benefits of using RMB are relatively straightforward. If you buy from China, your suppliers' costs are likely to be billed in RMB, in which case you may be offered better terms for settling in that currency. If you sell into China, accepting RMB payments may win you new customers. You can also open up parts of the market because there are numerous Chinese companies that can only use RMB. Your ability to set prices in RMB also means fewer negotiations and adjustments if exchange rates shift. Chinese exporters benefit from lower FX transaction costs, too, and they can better manage risk and cash flow.

The knowledge deficit has three broad elements to it – experience, education, and interpretation. A lack of experience is linked to a fear of the unknown; a lack of education means that companies don't know the operational details; and a lack of interpretation refers to the regional differences present within China. At HSBC, we work hard to help address all these issues.

The experience gap

Dealing in RMB is relatively new to many companies in the Canadian market, and even in China many firms are still unaware of the possibilities it can unlock for their businesses. This lack of transactional experience creates unease, and in many cases, Canadian companies can be nervous about being the first company in their sector to undertake an RMB transaction.

One of the most common questions we encounter is whether a similar company in a particular sector has already undertaken an RMB transaction. As the largest international bank in China with 173 branches1 covering all of the major industrial regions, HSBC can provide answers based on the wealth of experience we put at the disposal of our clients.

Being able draw on our knowledge of prior transactions for clients provides them with great comfort when they first venture into RMB. Knowing that you are working with a trusted advisor with hands-on experience in your sector is very important.

Having this abundance of experience positions HSBC to tackle the second knowledge challenge – dispelling popular myths about RMB transactions by educating the market in operational details.

Dispelling myths

Our extensive network within China allows us to stay current on top of regulatory changes as they happen. This is especially important as China has an “announce-and-implement” attitude to regulation. In other words, this can be a very quick process. We not only answer our clients' questions as they arise, we also alert them to changes as they occur.

This process of education is important in tackling the myriad of myths surrounding use of RMB. For example, foreign companies fear that once their cash is in China, it is trapped. However, there are a number of structures that allow you to move capital out of the country with relative ease. For example, the RMB cross-border loan structure allows your cash-rich onshore entity to loan funds to a related entity outside of China with no regulatory sign off.

Clients are also concerned that paperwork is more complicated under an RMB structure, but, in fact, it is simpler. Banks will accept documents electronically rather than demand physical documentation.

The knowledge deficit has three broad elements to it – experience, education, and interpretation.

Our Canadian clients have reported that suppliers in China worry that if they accept RMB instead of US dollars, they will be ineligible for an export tax rebate. The State Administration of Foreign Exchange (SAFE) has confirmed that not only will suppliers be eligible for a rebate on RMB export transactions, they will also receive it faster in RMB than in US dollar.

Myths and misunderstandings sometimes conspire to make Chinese suppliers less willing to accept RMB, but there are also genuine reasons why a Chinese firm may not be willing to transact in RMB. It may not be because they unaware of the benefits; it could be that they are unwilling to switch to a new process, or that they source in US dollars and have a hedge in place. This is something worth taking into consideration.

There are many of operational nuances like these that HSBC is able to confirm or clarify for our clients thanks to our relationships, long-term experience, and broad network in China.

The flow and interpretation of information

The final knowledge challenge is that of dissemination of regulatory information and its interpretation. China is a large country and it can take a long time for information to circulate. The regional differences can be stunning.

The larger cities and industrial Pearl River Delta region, where HSBC is investing heavily, are experienced in cross-border transactions in RMB, and they offer proximity to policymakers, financial centers, and free-trade zones. However, in the inland provinces, there is a lag in both experience and operational knowledge.

This is combined with interpretative differences from the nine regional branches of the People's Bank of China2, and the 36 branches of SAFE3, which interpret rules and regulations in varying ways within their own jurisdictions. HSBC's network in China allows us to accommodate for those differences and clarify rules at the branch level. We aim to offer service-plus at all of our locations across the country.

By leveraging our China network, HSBC is well-placed to help Canadian companies counter any knowledge deficit that may be holding them back from taking advantage of opportunities presented by RMB transactions. The buzz about RMB in Canada is growing as nimbler entrepreneurial firms, eager to reduce costs and open new markets, have already taken the first steps. Let us help you determine how RMB could enhance your business.

Contact HSBC to learn more about our RMB solutions.

Source:
  1. HSBC Network numbers as of March 5, 2015.
  2. http://www.pbc.gov.cn accessed in Chinese version on Jul 16, 2015
  3. http://www.safe.gov.cn/wps/portal/english/AboutSAFE/Branch accessed on Jul 16, 2015

Disclaimer

The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. The information presented in this document is subject to change without notice.

Certain of the products and services offered by HSBC and its subsidiaries and affiliates are subject to credit adjudication and approval. This document does not constitute an offer to provide the services and products described and the provision of such services and products remains subject to contract.

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