Ten years ago, few would have imagined that red coloured notes depicting a portrait of revolutionary would be the changing face of the dynamics in international trade. Looking further ahead, the prospect for wider internationalisation and adoption of the RMB appear positive. The announcement of the AUD being one of the only three currencies fully convertible to the RMB is just one example of the reforms coming out of Beijing this year.
What does this mean to the daily operational factors of doing business in China? How can companies benefit now? What should they do to tackle the challenges? A pragmatic approach and view towards the RMB and the day-to- day realities of using are required. Otherwise it is easy to be lost in focus on the changes happening on the macroeconomic level.
There are compelling benefits for European buyers to use RMB in their China trade transactions. According to our experiences, buyers have been able to negotiate 3-5% discounts in contract prices. Transaction costs are reduced with less currency exchange fees. Another benefit was that buyers saw greater transparency as quotations from Chinese suppliers can better broken down and facilitate better comparisons as well as competitive offers.
Chinese suppliers are not left out in enjoying the benefits. Foreign exchange risks are eliminated as they are only dealing with the domestic currency. There is less complexity in accounting and auditing. Furthermore, payment process times are greatly reduced. While the benefits of adopting the RMB are attractive, there are challenges which require steps to overcome them.
One challenge that might be faced includes the reluctance of some Chinese suppliers to switch to RMB prices. It is then important to sit down, discuss and understand the supplierâ€™s reluctance, determine if the difficulties they claim are actually genuine. Search for alternative suppliers that are willing to quote in RMB.
A second challenge would be staff at suppliers, local bank branches or local customs may not know how to handle RMB settlements yet. Educating the supplier and providing training is key to overcoming this initial challenge during the transition.
In some cases, it may take a few days longer to process a RMB transaction due to more stringent regulatory oversight. We recommend choosing a bank that is the most experienced in RMB transactions. Furthermore ensure full documentation is provided to the bank for each remittance.
The RMB has been consistently liberalising at the cautious pace set by Beijing. Adopting the RMB and benefiting from its use can seem daunting at the start but the groundwork within the company needs to be laid now.
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