US companies with operations in China deal in RMB and USD. US companies that import from or export to China face currency risk in their pricing. Were the same dealings conducted with European, Canadian or many other countries with convertible currencies, the customary range of financial planning and foreign exchange options are available. But with the RMB it’s more complex – and more expensive and tricky.
Some day the RMB will probably be convertible and will constitute one of the world’s basic reserve currencies. There will be no crystal ball projection here about whether this is the Century of China, etc. That’s stuff for college classrooms and Foreign Affairs articles. Instead, we focus today on what is increasingly available to US businesses with major Chinese involvement, existing or planned – namely, the use of Hong Kong as a secure location for RMB-based matters.
China has important reasons to offer Hong Kong to the world as a location for foreign economic interaction between the PRC and the outside world. Hong Kong is part of China, but pursuant to the “1 country, 2 systems” principle, is allowed substantial autonomy in how it operates and is considered a “foreign” jurisdiction for most PRC purposes. Hong Kong continues to be rated one of the freest economies in the world (generally placed ahead of the USA, with lower tax rates and ease of doing business). The 12th 5-year plan of the PRC specifically promotes Hong Kong’s development and calls for closer financial integration of China and Hong Kong. As summarized in an August 2011 “Tax Flash” by RSM Nelson Wheeler Tax Advisory Limited, “Recent Developments on RMB Internationalization,” China’s Vice Premier made an important address on August 17, 2011 regarding Hong Kong and its role as an economic bridge between the PRC and the rest of the world. Major specific points that offer US businesses a means of using Hong Kong to deal with RMB matters include the following:
- Increasing ease of using Hong Kong banks to hold RMB for non-Chinese customers
- Allowing Chinese enterprises (including those owned by foreigners) to issue in Hong Kong bonds denominated in RMB
- Increasing the limit for Hong Kong issued RMB bonds to RMB 20 billion
- Making RMB bond offerings in Hong Kong an ordinary and regular process
- Increasing the amount of RMB bank accounts in Hong Kong
- Letting Hong Kong exchange-traded funds be listed on mainland exchanges
- Permitting small RMB Qualified Foreign Institutional Investors to use RMB capital held in Hong Kong accounts for PRC investments.
This lst-on-the-list development is of great potential use for small and mid-sized US companies that wish to invest in Chinese operations, while not wanting to pour huge amounts into PRC registered capital (often referred to by non-Chinese investors as “trapped capital,” given the virtually impossible means of ever extracting it from the PRC).
Beyond the increasing ease of holding RMB accounts in Hong Kong (one can now also have an RMB account at the Bank of China, New York branch), trade settlement in RMB is increasing rapidly. Numerous regulations and circulars have been issued since 2009 to promote trade settlement in RMB. The RMB Trade Settlement scheme has been expanded beyond Hong Kong to numerous other regions, allowing companies in the approved areas to settle product imports, services trading and other current account transactions in RMB, and increasingly to settle merchandise export trades.
Circular 38, issued April 7, 2011 by SAFE, is particularly significant. It deals with both outbound and FDI transactions that can be handled in RMB, as well as lending, dividend and capital gain issues of importance to non-Chinese equity holders.
And on August 22, 2011, MOFCOM issued a draft circular (not yet effective) dealing with cross-border RMB for inward investment into China, aiming to differentiate “legitimate” outside sources of RMB capital that can be used to invest into China. This is an important advance, if finalized, as it would increasingly allow non-Chinese companies to hold RMB accounts outside of China and use the RMB to invest as the foreign company’s investment into China.
The impact of these measures has been to strengthen Hong Kong’s role as a financial bridge between the mainland and outside world. RMB deposits held in Hong Kong have been expanding greatly. RMB savings accounts, permitted since October 2010, have been expanding. Trade settlement in Hong Kong is growing substantially.
My commentaries have for several years discussed how the RMB is creeping its way towards the eventual status a world reserve currency, including free or at least freer convertibility. The steady advance of measures such as those referenced above shows the pace to be advancing beyond a stroll to a power walk.