What is the RMB Trade Settlement Scheme and how does it work?
Under the RMB Trade Settlement Scheme, eligible enterprises in Mainland China can settle trade with companies in Hong Kong, Macau and ASEAN (the Association of Southeast Asian Nations) in RMB, while companies outside of these regions can use Hong Kong as a platform to conduct their RMB trade. So, what was previously impossible because of a non-convertible currency has now become allowed: paying RMB invoices issued from Mainland-suppliers and receiving RMB payments from Mainland based customers. Subsequently, after the Hong Kong Monetary Authority’s recent elucidation on RMB-denominated financial services, a limited company in Hong Kong can now have a corporate RMB bank account. In fact, some of the banks have automatically added a RMB account without further charges to any integrated multi-currency account.
Who is eligible to participate?
Conducting RMB denominated trade settlement beyond the previously selected cities in mainland China (provided in China Focus Jan 2010) is possible subject to approval. A registration with the local People’s Bank of China (PBOC) is necessary where company information is required. The applying company must have a sound Custom record in terms of the Customs rating system. If you have a Hong Kong company and want to find out if your Mainland customers (or group daughter companies) are eligible, we suggest approaching a local office of the PBOC.
As counterparties, all companies from Hong Kong, Macau and ASEAN member countries can participate. Currently leading local banks have the most experience.
What are the advantages of China sourcing through Hong Kong?
If your company is frequently sourcing products from China suppliers you can in future consider asking for a quotation in RMB or even better, both in USD and RMB. This may save up to 5% since the supplier does not need to hedge his foreign exchange any longer. And since many less sophisticated suppliers may not use hedging instruments but rather calculate a few extra cents to cover fluctuations, they may feel more comfortable in trading in RMB anyhow. Apart from that, for the first time it gives a Hong Kong company the opportunity to exchange and keep RMB offshore which could be interesting in light of a possible revaluation of the RMB. Last but not least, in many cases Hong Kong offers more favourable RMB exchange rates than many other countries.
How does this change help you if you want to sell to a Mainland customer?
With the expansion of the scheme, trade and invoicing in RMB becomes possible between a Hong Kong supplier and Mainland customers. Transactions with some of these customers may have been previously out of reach because they had no foreign exchange available or did not want to take the trouble to get clearance from the State Authority of Foreign Exchange (SAFE) for payment of goods from overseas. This situation provides the opportunity to sell to China in RMB without having a company in China, but via a Hong Kong company. The support of banks with a wealth of experience in trade financing can only further contribute to this.
Are there requirements for supporting documents when transferring RMB between offshore and onshore RMB accounts?
The scheme is limited to RMB cross-border settlement purposes; these can be trade of goods and trade of services. PBOC rules do not specify the documentation requirements but evidence for the authenticity of the transaction (e.g. contract, invoice) must be provided.
Why was the RMB Trade Settlement Scheme started?
Since the RMB has seldom been used in international trade and investment transactions up until the initiation of the Scheme, it led to a severe mismatch between its global use and China’s role in the global economy. In addition, the global financial turmoil has created greater volatility in foreign exchange markets, and Chinese exporters/importers and their counterparts were thus given an opportunity to use RMB in cross border trade to reduce exchange rate risks and transaction costs. Many participants and experts are upbeat about the Scheme and HSBC expects this to expand drastically from last year’s pilot scheme where only 400 Mainland companies were eligible: the RMB trade volume in Hong Kong is estimated to reach RMB 2,600bn ten years from now.
Does that raise the importance of Hong Kong and of having a company here?
Experts argue that the introduction of the scheme in Hong Kong may give the city the potential to follow London’s past triumph as a dominating location to provide offshore financing, comparing when London allowed USD fund-raising in the 1960s to Hong Kong’s current case for Yuan-denominated financing. But besides this substantial new development for the finance world, we expect Hong Kong to become an ever more attractive place of business that will play a significant role in the corporate decision making of small and medium sized entities, simply because the options of conducting business have increased.
What countries have entered into Double Taxation Agreements (DTAs) with Hong Kong?
Since the beginning of the year 2010, double taxation agreements (DTA) have been signed with Brunei, Hungary, Indonesia, Kuwait and the Netherlands and the Hong Kong tax authorities have reached agreements on DTAs with Ireland, Japan, Liechtenstein and Switzerland. Negotiations are under way with further countries and the latest addition in Europe, Austria, has just been confirmed end of May while the signing procedure with France is being hampered by the current Euro crisis. For Hong Kong this development of a growing network of bilateral tax treaties is expected to bring fresh business and further trade and investment opportunities for all parties involved.
All information set out in this article is provided on the best of our current knowledge and understanding of the relevant laws, rules, regulations and guidelines governing or otherwise applicable to the RMB trade settlement scheme. Since we expect additional alterations to the scheme please refer to updates published.
Written by Thaddaeus Mueller, Business Development Manager of Fiducia Management Consultants www.fiducia-china.com