It will now be easier to directly invest in Chinese markets thanks to new legislation between the UK and China. Tuesday’s announcement of China’s agreement to open up its markets for British-based investors represents its latest move to establish the yuan as one of the world’s heavyweight currencies and underscores Britain’s determination to win a large share of the potentially massive Chinese market. But there are many changes occurring with how the RMB can be traded.

yuan

What is changing?
China is acting on its plan for the RMB to become an international reserve currency. In the past few months, there have been large advances in progressing towards that goal:

  • The RMB was unpegged from the dollar to reference a basket of foreign currencies on a managed floating exchange rate.
  • The year-old cross-border RMB trade settlement program was expanded to 20 provinces; restrictions for eligible corporations outside China were removed.
  • Free flow of RMB in Hong Kong: China lifted restrictions blocking the flow of RMB in Hong Kong.Increased investment in domestic interbank bond market: Foreign central banks, lenders in Hong Kong and Macao with existing RMB clearing and overseas banks involved in RMB cross-border trade settlement have the opportunity to gain more access to their domestic interbank bond market.
    • Anyone can now open RMB accounts in Hong Kong.
    • All types of corporations can now be granted any type of RMB loan.
    • RMB-denominated investment products can be created.
  • Eligible entities in China with necessary approvals can use RMB for direct overseas investments such as setting up subsidiaries, buying out equity stakes (M&A) and conducting project investments.
  • The R-QFII (RMB Qualified Foreign Institutional Investors) announced in December 2011 allows HK subsidiaries of Chinese fund companies and securities firms to re-invest RMB funds raised in HK back into China.
  • In March 2012 The People’s Bank of China (PBOC) announced an expansion of the Renminbi cross-border trade settlement scheme in a move expected to further promote the RMB as an international trade settlement currency. What initially started with 365 pilot companies and in limited geographic scope was in subsequent years expanded to cover over 60,000 qualified Mainland Designated Enterprises (MDEs) throughout China. The new rules announced by the regulators will allow all Mainland firms with import and export licenses to conduct trade settlement in Renminbi.

Who does this impact and how?
For anyone operating in China, looking to expand into China, or working with Chinese entities, the internationalization of the RMB will allow for more flexibility in payment, collection and potential investments. Clients are now able to open an RMB account in Hong Kong for payment and collection in Hong Kong and for cross-border trade settlement in China. They can also open an RMB non-resident account (NRA) in China for the RMB cross-border trade settlement with their counterparties in China.

The entire chain for cross-border trade benefits from the RMB trade settlement initiative:

  • Suppliers: The cost of currency hedging for suppliers will decrease and may be reflected in lower pricing. Concurrently, the whole settlement process is expedited, allowing for a faster payment cycle and lower Days Sales Outstanding (DSO).
  • Buyers: Buyers may be able to enjoy reduced administrative costs for making RMB payments.
  • Exporters: Exporters will interact with fewer government organizations to complete a transaction.

From a capital perspective, an increase in RMB loans and introduction of new RMB-denominated investment products are factors to consider when funding and investing. As regulations open up RMB investment opportunities for companies holding RMB, RMB-holders will increasingly be able to hedge their risk.

Read more from JP Morgan’s perspective here.

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