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The pace with which one country’s currency going global rests with the country’s overall national strength and its multinational enterprises’ competitive edge. And apparently RMB cross-border trade settlement pilot program is a piece of touchstone of Chinese footwear industry.
International experience shows that the pace of “going global “of a country's currency fundamentally depends on the country's overall national strength and the competitiveness of its multinational corporations. It is obvious the pilot program of RMB cross-border trade settlement is a piece of touchstone of Chinese footwear industry.
RMB Trade Settlement Guarantees Priority in Order Processing
Tai Jiang Shoes Co., Ltd, located in Hengfeng Shoes Industrial Area, Wenling, is the first among the 19 local foreign trade enterprises that applied to be a RMB cross-border trade settlement pilot. Looking back at the half year since the implementation of the pilot program, Wang Jianglin, chairman of the company, expressed his mixed feelings.
Mr. Wang made a series of calculations: according to the contract they signed with foreign enterprises, the shoe price is 4 dollars/ pair. With the RMB exchange rate against the U.S. dollar standing at 6.599:1 on January, 13, 2011), a pair of shoes would add 26.396 RMB to the companies account. However, when they were to deliver goods by the end of April, the exchange rate was 6499:1, which means that the actual amount of money they got is only 25.996 yuan/ pair. Here the exchange rate differential is as high as 0.4 yuan. And the larger the deal is, the higher the differential will be. But as we adopt the RMB Trade Settlement, those problems no longer bother us at all. “Therefore, now whenever I meet with new customers, the every first question I asked will be whether or not they are willing to be settled in RMB, if yes, we would prefer to take their orders” said Mr. Wang.
Nowadays more and more shoe companies like Tai Jiang gain benefits from the RMB cross-border trade settlement. According to the statistics of the Hangzhou Central Branch of People's Bank of China, during the one year since the pilot programs were carried out, the number of enterprises participated in this program grew from 90 odd to more than 1700 by the end of June. And the amount of settlement also experienced a steep increase. In the first half of this year the total settlement reached 100.587 billion Yuan, 8 times more than that of the same period last year. Calculated in accordance with the currency conversion costs rate of 0.2%, in the first half this year the RMB cross-border trade settlement has saved at least 133 million yuan for these enterprises. “The smooth operation of those RMB cross-border exchange settlement pilot showcases the market’s need for this kind of settlement.” so said Zheng Nanyuan, vice president of the Hangzhou Central Branch of People's Bank of China. He then took out a stack of report forms and made a thorough analysis: in the second half of 2010 when the pilot program was firstly carried out, the monthly cross-border RMB trade settlement in Zhejiang Province was only several billion or so. And the total amount in 2010 was only some 12.3 billion yuan. However, this year the pilot program has experienced a drastic change. In January and February the amount of settlement exceeded 5 billion yuan, in March, more than 10 billion and in June, well exceeded 30 billion Yuan. In only 6 month, the total amount of settlement in Zhejiang Provice exceeded several hundred of billions and ranked No.4 among all the provinces and cities in China. By the end of June this year, Zhejiang Province had conducted cross-boarder RMB trade settlement with altogether 58 countries and regions.
Apart from the Increase in Amount, the RMB Cross-border Trade Settlement Undergoes Structural Changes
Zheng Nanyuan revealed that the pilot program initially involved only with the trade in goods, but now it has extended to trade in services, profit and current transfers, cross-border RMB Direct Investment, foreign direct investment in RMB, RMB cross-border trade financing, letter of guarantee for RMB and other services. Among them, the imports of goods trade settlement, re-export trade settlement, cross-border trade finance have become the province of RMB main business. In the first half this year, the total settlement amount reached nearly 100 billion yuan, accounting for the major part of settlement income. This brought many benefit to Zhejiang, one of China’s most important base of import and export trade.
According to Zheng Nanyuan, the RMB settlement of cross-border trade has at least four advantages: Firstly, it helps to avoid exchange rate risk; secondly, the use of a single currency can make operation cost become clearer and easier to be calculated; Thirdly, it reduces the exchange rate costs from currency exchanges and export and import exchanges rate, and lastly, it accelerates the settlement rate and improves efficiency.
The Buyers and Sellers Would Be More Willing to Adopt RMB Settlement After the Bottleneck Problems Being Tackled
Although cross-border settlement of RMB began to fare smoothly, the building of this system has not been all plain sailing. On the contrary, there are many bottlenecks problems to be solved.
Firstly, foreign buyers, especially traders from American and European countries’ acceptance of the RMB are still not high. As RMB’s appreciation expectation is fairly stable, many foreign investors do not want to bear the risk of exchange rate fluctuation.
Wangjiang Lin admitted that at present not many foreign traders is willing to accept RMB settlement in the daily trade. "We are not the only one wanting to make a profit, our foreign trade partners also do. As the appreciation of the RMB exchange rate is the general direction, foreign companies are unwilling to bear exchange rate risk transferred to them by Chinese enterprises." However, he is still optimistic about prospect of the cross-border RMB settlement.
Secondly, the total amount of RMB settlement is relatively small. a official of Zhejiang Provincial Department of Commerce said that although in the first half of this year, the total amount of RMB settlement of trade in goods in Zhejiang came after that of Guangdong, Beijing, and Shanghai, ranking No. 4 of the nation, however, compared with the total export and import volume of the province, the RMB settlement amount was still relatively low. According to statistics at the end of June, in the first half this year, the total settlement amount of trade in goods (excluding services trade) of Zhejiang Province relative to the province's total import and export trade volume is less than 4%.
Imbalanced structure is another problem. Its most prominent feature is the unbalanced RMB settlement in import and export trade. Statistics showed that from January to June this year, the ratio of import and export goods trade against the RMB settlement of the Zhejiang Province is 31.6:1, the export ranking significantly disadvantaged, compared the national import and export goods trade, RMB ratio is 9.7:1, well below the national ratio.
In addition, companies involved in cross-border trade RMB settlement still have great potentials to be tapped. by the end of June this year, in Zhejiang Province altogether there are 1748 enterprises that are doing business accounting on the RMB cash basis, whose scale, compared with the province's over 40,000 import and export enterprises and first batch of 6709 exporting pilot enterprises, is still not large enough.
According to an official in Hangzhou Central Branch of People's Bank of China, there are many reasons leading to these bottlenecks. For example, at present traders in many countries and regions are not willing to accept RMB settlement, there is a lacking of initiative of foreign currency settlement, and the amount of offshore RMB is still relatively small, the liquidity insufficient, and the investment channel blocked. Besides, the internationalization of oversees Chinese-funded banks is yet to be improved, and the driving force of RMB settlement is still inadequate. For example, the cross-regional banks between Mainland and Hong Kong all have different settlement systems, which also make it difficult for enterprise to manage funds effectively and reduced the efficiency of business operations. And sometimes Hong Kong enterprises would even terminate the cooperation with its partners in mainland China because the latter do not have Hong Kong bank account.
Compared with the aforementioned factors, the limited foreign importers and exporters’ RMB repo channels are regarded by the market as the biggest bottleneck for the further development of RMB cross-border trade settlement. Currently, in addition to real trade, the RMB repo channels are limited to several types such as Three Types of Organizations like the clearing bank’s investment in domestic inter-bank bonds. The direct effect of which is the RMB obtained from the overseas trade has “no where to go”, and as a result, the RMB settlement seems not attractive enough for foreign institutions and traders.