Doing Business in China
The pace of economic and currency liberalisation is picking up in China. Barclays believes it is time to unleash the dragon and debunk some of the myths about doing business in the world’s largest consumer market.
With a population of approximately 1.4 billion people and a growing consumer and middle class, China is a beacon of opportunity for UK importers and exporters looking to expand globally. According to HM Revenue & Customs’ overseas trade statistics, UK exports to China grew by a compound annual growth rate of 17% from 2006 to 2013, the second largest growth rate after Switzerland on 32%. In terms of the UK’s top import sources, China is one of the strongest players in the top 10 with a CAGR of 9% in exports to the UK during the same period.
But entering a market as vast as China for the first time can be daunting, particularly for medium sized UK companies with little experience of doing business in this part of the world. Restrictions on the free movement of the Chinese currency, the renminbi (RMB), may have also created uncertainty among companies about how best to pay for goods and services they sell to or import from China.
The Barclays China Global Corporates team in Hong Kong – supported by China client teams based in London – note the liberalisation of the Chinese market, and how trading in RMB has picked up in recent years; China is very much open for business. Although the renminbi is still not fully convertible, there are immediate benefits to be gained by UK companies that pay Chinese suppliers in the local currency.
Understanding China’s currency
Martin Torreiro, FX Product Management, is confident China’s currency is on the rise: “US dollars may still be the currency of choice for our UK clients doing business in China, but it is time to demystify the RMB. We encourage UK companies to look at trading in RMB. It’s a currency they can purchase from us to make payments to their Chinese suppliers.” Although the state still exerts control over different aspects of the Chinese economy, Torreiro says a number of previous restrictions on paying in RMB have since been lifted. “If you go back 18 months or more, a Chinese supplier had to be registered to receive payments in RMB. Now as long as the transaction has an underlying trade element, payments for those goods and services can be made in RMB.” Other opportunities to take advantage of the currency are also available, such as hedging future expected cash flows through the forward market (only for corporates incorporated outside of China). “If that interests you, I would encourage you to speak to a member of the FX relationship team at Barclays to discuss the various approaches available,” suggests Torreiro.
From a cash management perspective, there are also reasons for optimism. As noted by Gordon Elliot, Global Cash Management, companies with sizeable cash balances sitting in China can now include these funds in a global cash pool. Companies can also centralise payments and collections, which is more in line with how they manage their cash in other parts of the world. “Financial liberalisation is accelerating in China,” says Elliot. “What’s key is that companies work with banks that understand how the RMB is evolving so they can help treasurers gain control over their RMB and foreign currency transactions.” This cooperation is crucial for success, as banks such as Barclays can help in keeping you up to date with the latest regulatory changes taking place as China liberalises its currency at a swift pace.
RMB ready for trade
According to data provided by the SWIFT network, in January 2015 the RMB was the fifth-ranked global payments currency and accounted for 1.6% of global payments. More than one-third of financial institutions globally now use the RMB for payments to China and Hong Kong. Despite this, adoption of the RMB by UK corporates has been slower.
Eric Balish, Director, Trade and Working Capital, feels that UK companies wanting to do business with China will need to start familiarising themselves with the RMB. “UK corporates will start to see more trade in RMB over the next few years,” he says. “Large companies will likely see evidence of this first, but smaller and medium sized businesses will also to an extent – regardless of your size, Barclays are here to offer support.”
As more Chinese companies are encouraged to use RMB to trade internationally, Balish says UK importers and exporters will increasingly deal in letters of credit (L/Cs) denominated in RMB. L/Cs are used for trade in China not only to mitigate credit risk but also to help Chinese suppliers to obtain credit, which can enable UK buyers to negotiate more favourable payment terms. “When exporting, offering 60 to 90 day credit terms when being paid under an L/C may offer a competitive advantage. The L/C proceeds can be discounted immediately on presentation of shipping and other documents thus accelerating cash flow” says Balish. He also notes that there are now more means available to UK companies to help them manage payment risk in China: “The market for credit insurance in China is growing in sophistication, and is increasingly available against Chinese buyers.”
Potential discounts for renminbi trade
Although it is currently more common for larger Chinese businesses to both receive and make payments in RMB, Balish feels that change is imminent: “Things won’t stay this way for much longer. UK companies should ask Chinese buyers and suppliers whether they can invoice or make payments in RMB, as there can be a discount or price benefit.”
Paul Nelson, Mid-corporate FX, agrees: “If there is an opportunity to pay in the local currency, UK companies could push to negotiate potential discounts with suppliers, as local businesses often build in a small margin when the payment is made in a foreign currency such as US dollar, to cover their foreign exchange risk.”
At banks like Barclays, several methods are available to make RMB payments to a Chinese supplier: clients with payables and receivables in RMB can open a RMB account, which can help in reducing foreign exchange costs. Irrespective of whether they have a RMB account or not, clients can use the bank to send RMB payments
Working with UK Export Finance
When it comes to the export financing needs of UK companies that are funding operations in China, Barclays works closely with the UK’s export credit agency, UK Export Finance (UKEF), which launched a range of solutions including direct lending, working capital and bond support schemes, to help smooth the path for UK companies looking to set up in China. “Often UK companies are faced with competition from overseas competitors that receive assistance from export credit agencies, which can make it difficult for them to navigate markets like China,” says Shyam Sankar, Capex Financing Solutions. “That’s where Barclays comes in, as we work closely with UK Export Finance and can make this assistance available to UK companies”
Given the range of support services available to UK companies looking to do business with China, Eric Balish is optimistic: “The opportunity is there and so are the financial tools, so we’re seeing more and more small and mid-size companies take the export leap. Why not talk with your bank about the steps you need to take to make China work for you?”
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