By Neil Graham, UK Managing Director At Travelex Global Business Payments (TGBP)
For decades the US Dollar has been regarded as the default global currency, but after a turbulent 2011, UK-based SMEs are increasingly turning to China to take advantage of the world’s second largest economy.
UK exports to China grew by 19% between 2002 and 2009, a trend mirrored outside the UK as well. There is a growing consensus that the Chinese renminbi will soon challenge the US Dollar as a global settlement currency, threatening its position of sole dominance.
Compared to the Chinese economy, which grew at about 9.2% last year, the rise of the renminbi has been comparatively muted. The principal reason for this can historically be attributed to the Chinese government, who have held back direct renminbi payments from the global currency markets. For this reason, UK businesses trading with China had to convert their payments into the US Dollar before converting into renminbi, leaving them unnecessarily exposed to three currency fluctuations: sterling, dollar and renminbi.
The past eighteen months have witnessed large shifts in sentiment. China has quietly begun deregulating its currency and is starting to allow Chinese exporters to receive payments in the renminbi from overseas companies. The government in Beijing as well as Chinese companies are increasingly seeing the benefit of renminbi internationalisation. China’s currency remained strong in 2011, despite a weakening over 12 consecutive trading days in November which triggered concern among Western analysts. Nevertheless, the renminbi hit a record high of 6.30 against the US dollar at the end of 2011.
In June 2011, Travelex Global Business Payments became the first non-bank FX specialist to offer renminbi payments into China following further deregulation of the currency. Indeed, following reforms last year, TGBP’s biggest achievement has been to reach an agreement with The Bank of China (Hong Kong) to allow direct settlement in renminbi, which facilitates local clearing in China. Local clearance helps speed up and simplify payments, saving time and resource for UK SMEs while ensuring that transactions are more transparent for both payer and receiver.
Direct renminbi payments also help small businesses reduce their exposure to currency fluctuations and improve cost management and efficiency. Importers, for example, now have the ability to price, settle and invoice from sterling straight into renminbi, bypassing the US dollar middleman; British businesses no longer have to wait for transactions to be process in three different currencies. As a result, a faster, cheaper and more transparent supply chain is encouraged.
Indeed, supplier relationships often improve following the resultant reduction in foreign exchange documentation and delays in payment. Suppliers also may receive faster tax rebates from the authorities, helping reduce costs in the supply chain while simultaneously protecting profit margins.
Furthermore, direct renminbi payments help UK importers and exporters eliminate exposure to volatility in the US dollar. Although the dollar’s global dominance is showing signs of weakening, it is still used as a safe haven by investors, which sends it fluctuating during times of economic uncertainty. The dollar has ranged from 1.5308 to 1.61028 against the pound during the last quarter of 2011, a margin of over 5%.
Settling in renminbi helps UK businesses protect profit margins in another way as well. The ability to price goods and manage payments in a direct transaction decreases the chances of potential mark ups from buyers and sellers in China also looking to protect profit from foreign exchange risk.
The Bank of China is continuing to internationalise the renminbi while keeping a grip on the currency itself. A growing list of commentators see the possibility of the renminbi becoming a global reserve currency within as little as five years. UK-based SMEs that trade with China should get ahead of the game and where possible start trading directly in the renminbi now. These will be the businesses that will be well poised to grow their business with China as the currency becomes more widely convertible and the restrictions placed on it are gradually lifted.
Tips for businesses trading with China
- Whenever possible, it is always best to pay in local currency. Try and use a supplier who is able to place payments into local accounts, as this will eliminate unnecessary cross-border fees and delays.
- For payments to mainland China, check with the beneficiary to see if they are an authorised “MDE” (Mainland Designated Enterprise) which allows them to receive payments in renminbi. This will allow for a faster clearing time and more efficient processing of the payment.
- When making payments into Hong Kong, UK SMEs might wish to make payments via “Book Transfer”. This means that businesses can pay into and out of accounts within the same bank. Funds are therefore debited and credited instantaneously, speeding up the payments process considerably.
- Businesses should be aware that many Asian countries offer multi-currency accounts in currencies that include the US dollar and the Euro. For example, in Hong Kong, there is a US dollar clearing system that enables local payments within time zones when US dollar clearing is not available in the United States. There is, therefore, an obvious payment advantage that is only available when using a supplier that has local US dollar accounts.
- When making international payments, UK businesses would do well to consider Travelex Global Business Payment’s Future Payments Service. Future Payments offer a means of obtaining a fixed sterling cost for overseas payments by locking in an exchange rate for up to 90 days in the future. This enables businesses to secure their profits without being subjected to unpredictable currency movements.
For more information, visit www.travelexbusiness.com/uk
Western Union recently acquired Travelex Global Business Payments to form part of Western Union Business Solutions, which specialises in foreign exchange and international business payments. Western Union Business Solutions is part of a global financial network that has access to over 140 currencies around the world.
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