thecorporatetreasurer.com2 corporate treasurer June / July 2016

More haste less speedThe renminbi has entered a new era in which the market is playing a more in uential role, but regulators are still keen to control the ow 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 fi ve-year low against the dollar in late May, but, in contrast to the panic in early January when China’s central bank fi xed 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 fi xing method, not something that was happening at the start of the year. In August, the People’s Bank of China (PBoC) said it would fi x 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 fi ve 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 fi xing 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 offi cially 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 offi cially 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 fi x.

Although future deviation from the fi xing rate and mechanism-based pricing cannot be ruled out, treasurers should start to feel more confi dent 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 rmBMany 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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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 controlBalancing 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 controlsIt 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

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uSD/CnH Spot Rate (lHS)

CFeTS RMB Trade-weihted Index (RHS)

Source: Bloomberg

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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 BasketFrom 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

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Previous close [6.4950]

Movements to maintain RMB stable against

the reference currency basket

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Movements of market on previous day

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Movements of the reference

currency basket[-100pips]

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Previous fixing rate[6.5000]

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