International Business: The Advance of the Chinese Renminbi

China’s official currency is the Renminbi (“RMB”). The Yuan is the basic unit of the RMB, but is also used to refer to the Chinese currency generally, especially in international contexts. The distinction between the terms ‘Renminbi’ and ‘Yuan’ is similar to that between ‘Sterling’ and ‘Pound’, which respectively refer to the British currency and its primary unit.

The internationalization of the RMB has recently experienced a remarkable development. In January 2013, the RMB was the 13th strongest currency worldwide. It reached rank 7 in March 2014, leaving the Hong Kong Dollar, the South African Rand and the Russian Ruble behind.

In October 2013, more bank credits were conducted in RMB than in Euro or Yen. Although the US Dollar remained the strongest currency, accounting for 81.08% of the worldwide credit volume, the RMB reached rank 2, accounting for 8.66% of the worldwide credit volume before the euro with 6.64% of the worldwide credit volume. Germany holds rank 4 among the countries with the largest volume of RMB credit transactions.

RMB-payments: Quick and Easy

The RMB is not yet a freely convertible currency. However, the Chinese government has enabled small and medium-sized businesses quick and easy access to the RMB as a trading currency by creating the offshore Renminbi (CNH). CNH are freely convertible outside their homeland China. Payments in CNH are as simple as in Euro or US Dollar. There are no additional documentation obligations such as the submission of invoice copies for payments in CNY (the official currency code of the RMB) to China.

CNH/CNY: What is the Difference?

The RMB is the only Chinese currency. Its official currency code is CNY. Offshore Renminbi (CNH) are RMB in accounts outside of China and are freely available and tradeable. CNH that are transferred to China are repaid at a ratio of 1:1 in CNY and vice versa. Since there is only one Chinese currency, all RMB transfers, including those in CNH are carried out with the RMB currency code CNY.

The onshore Renminbi’s (CNY) exchange rate is determined by the People’s Bank of China on a daily basis and may deviate as much as +/-2%. The CNH’s offshore exchange rate is freely established on the market. Due to arbitrage transactions both rates are nearly identical.

Advantages of Trading in RMB

The following advantages may be mentioned for trading in RMB:

• Realization of better prices: 41% of Chinese businesses are willing to grant a discount in the amount of 3% or more if the business transaction is conducted in RMB (HSBC survey, October 2012).

• No renegotiations, which Chinese businesses usually like to conduct on the grounds of price deterioration due to exchange rate fluctuations.

• Easy rate fixation, which usually causes great administrative efforts for Chinese business partners.

• Compensation of payments with a neutral exchange rate when imports and exports are billed in RMB.

• The takeover of foreign currency management for subsidiaries in China.

• Easier accommodation of major customers’ demands for billing in RMB.

China will continue to lead the RMB in the direction of a freely convertible currency. This space should accordingly be watched.

Contact: Sparkasse Freiburg-Nördlicher Breisgau