Other people’s money
It’s perhaps the most primary concept in business: other people’s money. Mostly you’d prefer it if it were yours. But with international business, turning their money into your money, your money into my money, and my money back into their money, can be a little more complicated than just earning it. Because when it’s other people’s money, it’s other people’s rules.
Words by Katie Foley
Illustration by Rebecca Walthall
The Chinese are credited with the invention of paper money, which they named “Feiqian” or “Flying Money” because it was light and could be caught by the wind.
China’s modern day legal tender, the “Renminbi” (RMB) has been making headlines for the past three years. China’s historical currency restrictions, set in place to avoid “capital flight” – or rapid devaluation if investors were all to pull their money at the same time – are waning, creating opportunities for businesses both big and small.
With the meteoric rise of China as an economic power, the world’s largest exporter, second largest and fastest growing economy and all the other oft-quoted statistics, the RMB is being hailed as the next alternative in trade, investment and reserve currency, akin to the Greenback.
But before that can happen, serious changes need to occur with their restricted currency to make it more attractive and “convertible” from one currency to another. The upside is that change is already happening – fast.
Large multinationals the likes of McDonalds, Unilever, IKEA, Nokia, Volkswagen and Caterpillar have raised millions since relaxed regulations have allowed them to issue so called “dim sum” bonds to raise RMB for their Chinese expansion and investments, allowing them to reduce their reliance on the volatile US dollar.
Closer to home, Fonterra raised ¥300 million (NZ$56million) in June 2011, the first Australasian corporate to raise RMB via the capital market.
Head of Trade and Supply Chain at HSBC Gary Cross says this move by Fonterra is key to showing the Chinese their commitment to the market.
“The Chinese particularly respond well to that because they’re showing that they’re there for the duration, they’re not there to come and go,” he says.
Most New Zealand companies so far have a “wait and see” mentality about the potential RMB offers their company, despite the rate at which progress is happening.
“A lot of people are just seeing it as some- thing that is going on, and we’ll worry about it at a later point,” he says.
The key potential benefits for New Zealand companies of using RMB are both hard measures around pricing advantage and access to a wider, more diverse buyer base, as well as a softer side – showing commitment to China by dealing in their currency.
Early experience has shown that exporters who put up two prices – an RMB price and a US dollar price – in order to test the waters for pricing advantage may find they avoid the currency fluctuation premium that’s factored into invoices to allow for movement between RMB and USD.
“A lot of companies are heavily, heavily reliant on the success of China, so if they can eke some advantage out of that, it helps to offset some of the risk by being so reliant on one market,” he says.
This is particularly pertinent for smaller companies, where small gains made in pricing have more of an impact because of their scale.
“In a lot of respects, the advantages that are to be had probably have more of an impact on the small guy. They’re the ones that can really leverage it for all it’s worth.”
And when it comes to buyers, not all Chinese companies have access to foreign exchange – they may trade only domestically in RMB. Being in a position to deal in RMB could potentially give New Zealand companies access to a wider and more diverse array of buyers.
It’s a sentiment shared by Asian Sales Manager Adrian Gray of lumber exporter LumberLink, who is currently “keeping an eye on it [RMB] and we will see how it unfolds.”
They started investigating the potential to use RMB to settle their cross border trade with China several years ago.
Currently the business they do with China is split approximately 40 per cent with companies that manufacture for domestic Chinese consumption and 60 per cent with companies that use LumberLink’s product for re-export, while allowing for the many companies that do both.
With the intense squeeze on margins for re-exporting companies, it’s likely more Chinese manufacturers will turn inwards to their own burgeoning middle class.
“I think as the world unfolds we will hopefully see more internal because the re-export to economies like the US is pretty tough,” Gray says. “We know the Chinese margins for the manufacturers that are exporting is appalling, they’re under huge pressure all the time. The retail sector in the US just pounds those guys down on pricing, so they’re running pretty skinny and we are seeing more of those people are going towards more domestic.”
But for LumberLink, every initiative they take on must be customer driven, and they aren’t seeing Chinese importers knocking on their doors asking for prices in RMB – yet.
The 2011 HSBC RMB Cross-Border Trade Settlement Survey showed that nearly eight in ten businesses in Mainland China that had not yet started to use RMB to settle cross-border trade were planning to use or adopt it conditionally in their future transactions.
And HSBC in-house estimates predict that more than US$2 trillion or 50 per cent of China’s total trade flows with emerging markets will be settled in RMB by 2013 to 2015.
All indications are that this is a fast moving space. The Chinese Government’s initial toe in the water came in April 2009 when they started a pilot scheme allowing specific exporters and importers in Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai to use RMB to buy and sell their wares. In June 2010 the scheme was expanded to cover 20 provinces.
July 2010 saw the foundation of the offshore RMB market in Hong Kong that allows the likes of Fonterra to raise millions of dollars worth of RMB for their Chinese expansion. In January 2011 it was announced that all mainland enterprises were now allowed to make overseas investment in RMB.
Cross says with New Zealand’s vested interest in China’s economic success, investigating RMB and its potential uses needs to happen sooner rather than later. He predicts 2016 will be the year the RMB becomes fully convertible with no restrictions and 2020 as the year the RMB will become a reserve currency alongside the Greenback and Euro.
“We’re a nation built on trade, and we’re reliant on the success of China to be a successful nation,” he says.
“The fact is that our exporters are not competing against other New Zealand exporters, they’re competing on a global stage, so any advantage, anything that enables them to be more competitive on the global market, is going to be advantageous for them.”
Originally published in IN-Business March/April 2012