1. thecorporatetreasurer.com2 corporate treasurer June / July 2016
More haste
less speed
The renminbi has entered a new era in which the market
is playing a more influential role, but regulators are still
keen to control the flow of capital as China gets to grip
with the implications. Treasurers must now look to re-
assess their renminbi policy. Ann Shi reports
T
he renminbi hit a five-year
low against the dollar in late
May, but, in contrast to the
panic in early January when
China’s central bank fixed the
renminbi at what was a record low level at
the time, markets responded calmly.
The calm was attributed to the central
bank’s recent habit of sticking to its new
fixing method, not something that was
happening at the start of the year. In
August, the People’s Bank of China (PBoC)
said it would fix the renminbi in line
with the previous close rate and take into
account market movements of other major
currencies.
The PBoC appeared to break that
promise five months later, raising
questions as to what the real anchor to
the renminbi was. In the haze, many
companies spent well over the odds
to hedge their exposure and are now
suffering because of it.
“Our simulation results based on the
renminbi CFETS [China Foreign Exchange
Trade System] index show that unlike at
the beginning of the year, there was no
systematic large deviation between the
actual fixing rate and the mechanism-
based pricing since mid-February,” China
International Capital Corporation (CICC),
a China-based investment bank, wrote on
May 30.
The currency is officially pegged to a
basket of 13 currencies – including the
US dollar, the euro and the Japanese
yen – with weightings based mainly
on trade volumes with major partners.
CFETS officially launched a renminbi
exchange-rate index based on the basket
on December 11 last year.
By most accounts, the central bank
has improved the transparency and
communication of its policies. Foreign
exchange (FX) traders now primarily
look at the basket index to bet on where
the renminbi heads next – a major shift
of reference point; earlier, they primarily
checked the daily fix.
Although future deviation from the
fixing rate and mechanism-based pricing
cannot be ruled out, treasurers should
start to feel more confident about focusing
their attention on how external factors
will dictate the movement of the renminbi.
For example, what would a vote for Brexit
mean or what are the implications of a US
Federal Reserve interest rate hike?
Although far from a perfect guide, The
Corporate Treasurer has attempted to lay
out key policy implications and market
developments – mainly offshore – to help
treasurers reassess how they manage the
renminbi.
weak rmB
Many FX strategists predict the renminbi
will continue to weaken for the remainder
of the year. For example, Christy Tan,
NAB’s head of markets strategy and
research for Asia, expects the renminbi
to drop to Rmb6.65 against the US dollar
by year end, and recommends companies
with a six-month horizon lock in that rate
via hedging. However, for those looking at
a 12-month or 18-month horizon, Tan said
the renminbi would resume strengthening
against the dollar.
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2. thecorporatetreasurer.com June / July 2016 corporate treasurer 2
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3. thecorporatetreasurer.com26 corporate treasurer June / July 2016
Huang Bilie, CFO at Sinotrans & CSC,
the biggest China-based comprehensive
logistics supplier by total assets, echoes
Tan’s view. “We expect it could reach
Rmb7 per dollar at the year-end, but most
likely somewhere around Rmb6.8,” Huang
told The Corporate Treasurer, adding “then
the renminbi would either stabilise or
fluctuate briefly around that level, before
[strengthening]”.
To maintain a safety net in the first
few months of this year, Huang retained
overseas earnings, mostly in US dollars,
at the regional treasury centre in Hong
Kong. If the dollar appreciated against the
renminbi more than expected, “we could
be ready for such surprises, just like we
were last year,” said Huang.
Huang was referring to the surprise
devaluation in August. His company made
several moves in response, including
converting offshore dollar loans into
renminbi and sweeping the renminbi
proceeds back home. The money was used
for domestic capital expenditure.
Under control
Balancing capital flows across borders
plays a big role in policymaking for China.
And to get there, the government put in
place a handful of temporary and targeted
regulatory measures to tighten onshore
demand for foreign currencies, presumably
out of fear a weaker renminbi was
triggering a flight of capital that would put
the currency under even more pressure.
HSBC calls this an “ease-then-squeeze”
approach: “When FX flow pressures
become less one-sided, then FX policy
should ‘ease’ and allow market forces to
play a bigger role in balancing demand
and supply. But if speculative activity
becomes too intense, then FX policy is
likely to ‘squeeze’ out these pressures,” the
British bank noted in a May 10 report.
Among other “squeeze” measures, the
State Administration for Foreign Exchange
(Safe) in late January guided banks to
limit companies’ FX purchases via current
accounts. Under the verbal guidance,
companies can only buy FX a maximum
of five days before an import payment
is due. On January 18, China suspended
net outflows of money from cross-border
renminbi cash pools in the country. At the
end of May, those restrictions are still in
force, The Corporate Treasurer understands.
Other means of transferring funds
overseas, including onshore guarantees
for offshore credit and overseas direct
investment, have all “more or less”
experienced tightening via “window
guidance” by policymakers, said a
Shanghai-based cash management
consultant with knowledge of Safe’s
thinking. Policymakers would remain
“conservative” for now, he added.
Capital controls
It seems China is also keen to secure as
much FX as possible during this period.
Renminbi stability may be back under
control, but that also means all China-
related FX transactions are under tight
government oversight
“I think Chinese regulators nowadays
want more foreign currencies than
renminbi, so we feel a lot of pressure
from regulators to get more FX into the
country,” a Hong Kong-based group
treasurer at a European transportation
company that operates in China said. To
that end, Safe has pushed companies to
come up with payment collection plans
to get overdue remittances and invoices
settled as soon as possible.
For treasurers at multinationals,
leading-and-lagging is a common practice
for managing cross-border cash flows. By
delaying payments on any inter-company
purchases of goods or services from a
company’s China entity, the company can
retain the funds for overseas working
capital needs. Similarly, if the China entity
buys from the company’s overseas entity,
it could speed up the payment to get funds
out of China much quicker.
“Companies
should assess
the weighting
of their
exposure
to different
currencies
based on their
operations,
and put in
place policies”
spot VS cfets
6.8
6.7
6.6
6.5
6.4
6.3
6.2
6.1
6.0
104
102
100
98
96
94
11Dec15 08Jan16 05Feb16 04Mar16 01Apr16
USD/CNH Spot Rate (LHS)
CFETS RMB Trade-weihted
Index (RHS)
Source: Bloomberg
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4. thecorporatetreasurer.com June / July 2016 corporate treasurer 27
RMBmanagement
For companies that generate positive
cash flows in China and need to fund
overseas operations, this method has been
a popular and effective way for treasurers
to move excessive liquidity out of China.
Now, the perks are gone. “Now China
is really looking into all the details of
your inter-company receivables, asking
questions such as why that [payment]
hasn’t come in…This makes life a bit
difficult,” said the treasurer.
Sinotrans & CSC’s Huang confirmed
Safe was encouraging an influx of US
dollars, and other foreign currencies,
especially at the start of the year.
“A slowing-down of outflow of US
dollars started from mid-January, and in
February, the outflow really stopped and
the inflow and outflow were just balanced
– that’s part of the measures Safe took
directly to banks, [corporate] in-house
banks and major corporations to take their
dollar income back to China, to counter-
balance capital outflow,” said Huang.
Sinotrans & CSC runs an in-house
bank based in Beijing. Although Safe’s
push happened to marry well with the
company’s need to settle all receipts and
payments by the end of its accounting
year in December, Huang admitted
the company had speeded up payment
collections for invoices from overseas
entities and other companies in response.
“[Companies] should basically think
twice before they put more money in
China,” said Alicia Garcia-Herrero, chief
economist for Asia Pacific at Natixis. She
expects Safe to maintain its tightened grip
on capital outflows for some time.
Bye USD, hello basket
From a hedging perspective, companies
with exposure to the renminbi but
operating offshore do have access to a
reasonable range of tools. Exchanges are
now gearing up to offer a more diversified
portfolio of hedging instruments.
Among them, Reuters reported the
Taiwan Futures Exchange was looking
to launch a USD/CNH futures options
product in June, if regulators approved.
Hong Kong Exchanges and Clearing
(HKEx) on May 30 introduced cash-settled
euro-renminbi, Japanese yen-renminbi
and Australian dollar-renminbi futures
products. Additionally, it launched
US dollar-denominated cash-settled
renminbi-US dollar (CNH/USD) futures
to complement its physically delivered US
dollar-renminbi (USD/CNH) futures. The
CNH/USD futures are traded in US dollars
and the others in renminbi. During a
promotion period that lasts until the
close of afternoon trading on November
30, exchange fees for the new futures
contracts will be waived for futures
exchange participants and their clients.
Drawing on experience with USD/
CNH futures, Julien Martin, head of fixed
income and currency product development
at HKEx, expected the new futures to be
used by onshore and offshore participants,
including small-and medium-sized firms
and especially exporters and importers.
According to Martin, the products were
inspired by the PBoC’s new FX regime.
The shift is a “smart” move, said Martin,
as the Chinese currency, or more broadly
the Chinese economy, isn’t linked to the
dollar alone – the EU is China’s largest
trade partner, the yen is the world’s third
most traded currency, and Australia is
one of China’s top commodities trading
partners, with the Aussie dollar strongly
linked to commodity prices, for example.
The divergence of the CFETS trade-
weighted index from the dollar-renminbi
exchange rate is a case in point. Although
the renminbi exchange rate has stabilised
recently, the renminbi actually weakened
against the CFETS index (see graph). This
means companies that usually deal with
multiple currencies need to start assessing
currency risk on a weighted average basis.
In Huang’s words: “Like any big
multinational, we have a portfolio of
multiple major currencies, including the
dollar, renminbi, the yen, the euro…so
we’ll have a weighted average of [currency]
risk exposure.” In other words, companies
should assess the weighting of their
exposure to different currencies based on
their operations, and put in place policies
– for hedging, payments and liquidity –
according to those weightings.
Huang said the new renminbi futures
contracts would “provide additional
instruments for us to weigh against
currency risk”. The ticket size is relatively
small – for CNH/USD futures for
example, the block trade threshold is 50
contracts and the size of each contract is
Rmb300,000 – but Huang expects the size
to grow as volume increases.
Now, it’s the time of the basket. As
Huang suggests, companies need “a
strategy to balance the onshore and
offshore risks while maintaining enough
liquidity for regular and urgent payments
across different currency pairs”. n
An example of how a fixing rate is formed
Source: CICC Research
Previous close
[6.4950]
-50pips
Fixing rate
[6.4850]
Previous close
[6.4950]
Movements to maintain
RMB stable against
the reference
currency basket
[-100pips]
Movements of
fixing rate
[-150pips]
Movements of market
on previous day
[-50pips]
Movements of
the reference
currency basket
[-100pips]
- =
= +
= +
Previous fixing rate
[6.5000]
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