Key Points:

  • Eligible companies registered in five Chinese cities are allowed to use RMB to settle cross-border trades
  • Two options are available for settlement in RMB
  • RMB financing services are available for overseas participating banks and traders

Because of big swings in the US dollar, the euro and other major settlement currencies, China-based exporters and importers and neighboring countries face relatively huge risks of exchange rate fluctuations. In order to reduce the risk and reliance on foreign currency for international trade, the State Council announced the pilot RMB Trade Settlement Scheme in April 2009. Following the announcement, the authorities promulgated the Pilot Cross-Border Trade RMB Settlement Administrative Measures on July 1, 2009. The implementing rules were also released on July 4, 2009 (collectively, the “RMB Settlement Rules”). The People's Bank of China (“PBC”), the Hong Kong Monetary Authority and the Macau Monetary Authority have been working closely on the implementation of the pilot scheme, including the related arrangements for the cross-border settlement and clearing of RMB funds and amendments to the existing legal documents such as the clearing agreement for RMB business.

This pilot scheme currently allows eligible companies registered in five Chinese cities – Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan – to use RMB to settle cross-border trades with companies doing business in Hong Kong, Macao and Association of Southeast Asian Nations (ASEAN) member countries. Pursuant to the RMB Settlement Rules, enterprises eligible for RMB settlement shall be recommended by the local government at the provincial level. Based on the recommendation, agencies including the PBC, Ministry of Commerce, General Administration of Customs, State Administration of Taxation and China Banking Regulatory Commission will examine the candidates and finalize the list of eligible enterprises.

Companies participating in this pilot program may continue to settle their trades in other foreign currencies, as settlements in RMB are voluntary. Under Article Five of the RMB Settlement Rules, the PBC will closely monitor the aggregate amount of RMB settlements to ensure that they will not undermine China’s macro economic policy objectives.

Under Article Six of the RMB Settlement Rules, companies that wish to settle their cross-border trades in RMB can choose between two options:

  1. Settle the trades through commercial banks in Hong Kong or Macau that are approved by (i) the People’s Bank of China and (ii) the Hong Kong Monetary Authority or the Macau Monetary Authority, whichever is applicable. These commercial banks must also be members of the People’s Bank of China Large Value Payment System.
  2. Settle the trade through a China-based bank operating in one of the designated cities under this pilot program. The China-based bank will serve as the agent bank for the overseas participating bank used by the non-China-based trading partner. To facilitate RMB settlements, the China-based agent bank will maintain an inter-bank fund transfer account denominated in RMB for the overseas participating bank. Under this arrangement, the China-based agent bank will also be responsible for disclosing the agency agreement and reporting any RMB account information to the People’s Bank of China.

A China-based agent bank may purchase and sell RMBs per requests of an overseas participating bank within the amount limit set by the PBC. Furthermore, a China-based agent bank may provide financing for the inter-bank RMB fund transfer account opened by an overseas participating bank in order to meet the latter’s temporary liquidity demand. However, the China-based bank’s total account balance used for financing with its overseas participating banks may not exceed 1 percent of the total RMB deposit balance at the end of the previous year, and the financing term may not surpass one month. In addition, a domestic settlement bank may provide RMB trade financing services for the overseas enterprise, subject to the amount of the trade contract.

After the settlement, if the China-based enterprise does not obtain the related RMB proceeds within 210 days after exporting the related goods, it must report the outstanding amount and other related information to the PBC’s system within five working days via its China-based settlement bank. Nevertheless, the RMB Settlement Rules allow a China-based company to deposit its RMB export proceeds in an overseas bank, provided that it reports to the local PBC.

The Bank of China has launched RMB clearing services for trade settlement and carried out the first cross-border trade settlement denominated in RMB since the promulgation of the new measures regulating the pilot program for these transactions. The Shanghai branch of the Bank of China received its first cross-border RMB trade settlement deal from the Bank of China (Hong Kong) on July 6, 2009.

The RMB Settlement Scheme is a small but important step in “internationalizing” the RMB. With more China-based and overseas enterprises starting to use the RMB as settlement currency in international trade, more RMB will circulate overseas, which we believe will certainly promote RMB free convertibility in the future.