Financial | How to mitigate currency and payment risks when trading with China

In the 9th session of Crayfish.io’s ‘China - Let’s Talk Business’ webinar series, we talked about how to mitigate currency and payment risks when trading with China. Crayfish’s webinars are designed to be light, short but helpful in terms of practical takeaways for your business. Founder and CEO of Crayfish.io, Ting Zhang, hosted the talk with Guest speaker Isabel Ye, the director of the China Initiatives at Ebury, and a trusted Crayfish partner. Isabel oversees all the initiatives on the China-West corridor at Ebury and has over 10 years of international working experience as a consultant in McKinsey Spain and risk management at Banco Santander, Hong Kong.

 

Let’s start explaining the local denomination of the currency in China, Ren Min Bi yuan, RMB.

RMB has different denominations in the foreign exchange markets, as per the table below: 

 CNY

CNY non deliverable

CNH

China excluding HK, Macau

Outside China

Outside China

Daily rate fixed by PBOC

Free float

Free float

Deliverable inside China

Settlement in USD

Deliverable outside China

Non Ebury Access to liquidity

n.a

Ebury access

In order to avoid confusion we would be referring to it as RMB throughout this article.

 

Before 2016, RMB was pegged against US dollars as this was the common currency used for cross border trade between China and the West. Most suppliers in China were invoicing their overseas clients in US dollars.

As China’s economy grows and it embarks on the internationalization of its currency, in October 2016, the Chinese yuan became part of the International Monetary Fund’s Special Drawing Rights (SDR) basket of currencies. This was an important milestone for China, and also the RMB was no longer only pegged to the US dollar, it was also pegged against G3 currencies, the Swiss franc, and Japanese Yen. 

As a result of this, we have started seeing more fluctuation of the RMB in the foreign exchange markets and more cross-border transactions being settled in RMB. 

 

If you are an importer, consider paying directly in RMB to your supplier in China as this is becoming a trend in cross-border trade with China, due to the benefits it brings to both parties:

  • From the Chinese supplier’s perspective, this protects them against the fluctuations of USD/RMB and consequently it can avoid potential friction with the client when the supplier raises prices due to adverse exchange rates.
  • From a Buyer’s perspective, transacting in RMB means you can ensure you will get stable prices not impacted by the exchange rate fluctuation and given you are asking the supplier prices in their base currency, you will ensure you have the most competitive prices and full transparency on why prices may rise.

However Chinese suppliers are not always willing to switch to invoicing in RMB, and this could be due to the following reasons: 

  1. The supplier has concerns over losing their tax benefits – this is a common misconception. The supplier might think they would not be able to claim VAT rebate for their exports if it is paid for in their local currency. However, this is not true, as long as the RMB payment is received from overseas, the supplier can apply for a rebate of this VAT. 
  2. More paperwork from the bank – this should be easier for suppliers now with the new guidelines from PBOC released in December 2020. 
  3. Suppliers working through offshore accounts in Hong Kong or elsewhere made it difficult to send RMB directly from the offshore account to Mainland China. In order to address this issue, Ebury has developed a unique product “parallel forward”. 

If you are doing business with China and need to receive money from China, you need to ensure you are familiar with the current regulations in China regarding sending funds out. There are strict capital controls in Mainland China to move money inside and out of the country. Right now, the categories that Chinese regulators allow you to move money abroad in a business domain are: 

  • Cross-border trade of goods
  • Cross-border trade of service, e.g. travel, logistics, etc.
  • Overseas education, e.g. tuition fees
  • Overseas conferences

As long as you submit the relevant documentation to your bank when you make the payment, they will be able to send the money out. If you are an exporter that sells directly to Mainland China and invoices directly to a company in Mainland China, you will be able to receive these funds from the Chinese counterpart directly, without any restrictions on the amount. On an individual level, each person has a foreign quota of US $50,000 or equivalent per year, which can be used for travel, education, or shopping. Cases not mentioned above will require special approval form the foreign exchange regulator, SAFE

 

Let us help you

At Crayfish.io we want to be your helping hand as you achieve success in China and Southeast Asia. Visit our online marketplace to hire bilingual providers to get your bespoke projects done, or browse our comprehensive range of fixed price services that deliver the best value for money for your cross-border working. For specific enquiries, you can also contact us.