Trading in Chinese Currency

Just like any international relationship, doing business in China presents a unique set of challenges and opportunities.

One aspect of Chinese trade that can be especially tricky is dealing in the local currency. 

A Quick Background to the Renminbi

You've probably heard financial commentators refer to both the RMB and the Yuan in relation to Chinese currency.

Put simply, the RMB is the official currency of the People's Republic of China, while the Yuan is a unit of that currency.

The value of the RMB currency is not determined by a true free floating exchange rate. Instead, it's floated against a basket of world currencies and trades within a defined range around a reference rate set by the Chinese Government.

It's important to know that there are two markets for RMB. CNY, which is only traded onshore within mainland China, and CNH, which is traded in offshore markets such as Hong Kong, Taiwan and Singapore and used by international businesses.

In the past it wasn't possible for international trades to be settled in RMB, with all payments made in US dollars and converted to RMB through the Bank of China in Hong Kong.

But in an effort to develop the RMB as an international currency, the Chinese Government has slowly been lifting these restrictions.

Australia, Japan and the US are now licensed to directly convert their currencies to RMB and it's also possible for all international companies to settle trades in RMB.

The offshore CNH market is developing too, with increasing availability of broader foreign exchange tools such as forward contracts, which allow international businesses to better manage risk. 

The Risks of Trading in RMB

While China is slowly liberalising the RMB, there's still a long way to go before it becomes a true international currency.

Trading in RMB is regulated, and it includes many complex policies and procedures, and as with trading in other foreign currencies, these in themselves can introduce a number of risks.

However the RMB's momentum is building and the market is rapidly developing, so if your business has a strong interest in China it's important to ensure you're well positioned to respond to these shifts.

Why Settle in Renminbi?

There are several of ways that your business can benefit from settling trades in the local Chinese currency.

Trading in RMB can help you control foreign exchange risk by reducing exposure to multiple currencies. If there's only one conversion to be made, you're better placed to make it a cost effective one than if you're going through two currencies.

There's also the potential to improve relationships with Chinese counterparties by taking responsibility for foreign exchange transactions, negotiate better payment terms - including discounts - and work with a wider range of businesses in China.

So, while dealing in Chinese currency can be complex and does come with its risks, there are some significant opportunities at hand for your business. An experienced and skilled partner can help you seize them.

Speak to your Relationship Manager today to devise your RMB foreign exchange strategy.

It's easy to get started with American Express International Payments service, simply get in touch to find out how.

Sources

"Developments in Renimbi Internationalisation"

RMB invoicing in a longer run context: opportunities and challenges for Australia

Corporate Attitudes towards Renminbi Trade Settlement and Investment

The Difference Between The Confusing Onshore And Offshore Renminbi Market

How China's Renminbi Went From Overpriced Certificates To Major International Currency