Key words:#receivable #localcurrency #currencyriskmanagement #currencyfluctuation #CNYcurrencyrisk #CNYpayment
Thanks to my former career path in Umicore, where I learned hedging,
in precious metal and also foreign currency exchange, the latter
provides me good insight and basic knowledge about the currency risk
management, and how it plays the role during the daily trading business
between foreign countries and China.
We were exporting some of the products to Europe and America, usually got receivables in USD or EUR currency from our clients overseas, then we converted them into local currency – Chinese Yuan or CNY, over a period by a pre-hedged exchange rate under the frame of the contract, which isn’t much the case for many local exporters. The model went on and on for years.
Apparently customers had no big problems with paying USD/EUR to us in China, as there is no risk exposure of currency and easy to manage, from their side.
However, there were still complains from time to time came to me.
Due to the open risk of currency fluctuation, we had to adjust the foreign exchange rate per order in order to defend our position, which often than not made those customers unhappy. Although, we had another option to fix the rate for a longer period, by using the clause in the contract like “the foreign exchange rate will be reviewed and evaluated every six months, and need to be adjusted merely if ratio changes beyond range of +/-xx%.” But you can not run away from the discussions or negotiations, for both.
However, one question from my colleague that time in finance department threw to me emerged recently into my mind. “Is it possible to ask our clients to pay CNY, instead of USD? There are benefits for both sides.” I was surprised about the question since it’s quite opposite to our long standing practices. I checked right away with my overseas customers, all denied unfortunately the feasibility, some even thought it was impossible to open a CNY bank account at their country. It was not true, in fact, but I only clarified the reality not long ago, so not to blame our old friends.
So you may ask, what are the advantages for me if I buy products or services from China by paying CNY?
There are pros and cons, from buyer's angle.
You would have the opportunity to buy at a lower purchasing price, relatively, as the cost of currency risk can be removed from the offer, also means simpler cost structure, which should be in buyer’s favor. And you will not have the headache again of fighting back and forth what is the suitable rate in your quote with your supplier in China, as now you are using same currency, which will be truly welcomed by your counterpart. What’s more important is your supply chain becomes more sustainable. More often your Chinese partner would speculate the foreign currency, which could trigger an operational risk if unluckily, and a lot of local suppliers here don’t have any experience, nor sense for currency hedging. Trust me!
The coin always has two sides.
Not every buyer, particularly small and medium enterprises, does not have the knowledge, or is able to manage the CNY currency risk, as it’s now on your side. This requires courage and skills.
The good news is more and more international banks started in recent years to offer your opportunities of doing business in CNY from your country. You can talk to and consult the experts from the banks in your country if you want to explore, so that your risks is maximumly mitigated.
I have listed a couple of websites that I found through Google they offer sort of CNY services, which can be good references for you, but you certainly need to check your local banks, I can not endorse these information.
Bank of China: http://www.boc.cn/en/index.html
Deutsche bank: https://www.db.com/specials/en/ghp/renminbi.htm
Nonetheless, you may still have some concerns before you go whether the city your partner locates will accept receivable in CNY, even there is a BOC. Right, there was a time that only five provinces support in China, but now already covers the most majority.
Another question could be a rumor I heard that supplier will not accept CNY payment, reason is they could not rebate for a tax refund in China when receiving CNY from overseas. This is not true, I have confirmed with tax authority in Suzhou, and later I also found the announcement from State Taxation Administration of China that confirms the fact.
Yet, we have not an existing client who is paying us CNY from outside of China to us, but we are discussing the option.
This article is rather from the perspective of supply chain or trading, not even a piece about the capital structure and management, or currency, finance management, even they could be the very first initiatives for CNY transaction with China, but it’s beyond my knowledge so far.
Look forward to having your stories or cases shared.