Multinationals are adjusting their posture towards the renminbi from “nice to have” to “must have,” as the currency becomes essential to their cross-border business strategy.
A recent poll of senior executives suggests the Chinese currency, also referred to as the yuan, is becoming more important to multinationals as an instrument of corporate finance. As their renminbi exposure grows and the government eases currency restrictions, MNCs have more room to pursue an assortment of currency plays.
While financial institutions seize exchange rate investment opportunities as a matter of course, corporates have mostly confined their renminbi association to transactions and transfers.
To be sure, global companies continued to be plagued by doubt when it comes to using renminbi; the lack of hedging options and overall liquidity do little to allay such concerns.
Yet, in a survey of 150 senior MNC executives conducted in Februay this year, the law firm of Allen & Overy found that 85% are devoting more investment to mainland expansion plans because of lower funding costs associated with less restrictive currency regulations.
In June of last year China’s State Administration of Foreign Exchange, or SAFE, issued new rules which in effect relaxed most of the existing restrictions on cross-border security guarantees and lower MNCs’ onshore financing costs.
The renminbi has appreciated 10% against US dollar in the course of the past five years. However, liberalisation of the exchange rate and widening of the currency's trading band has created volatility which led to depreciation and a drop to the level it was at two years ago.
Forty-seven percent of respondents said they used renminbi to finance acquisitions in the previous 12 months, while 28% said they hadn't used currency for acquisitions but would consider doing so over the next 12 months.
“This [finding] is all the more notable because 2014 was a slack year for China inbound foreign direct investment,” Jane Jiang, a partner in Allen & Overy's China regulatory practice, told FinanceAsia. Last year saw the weakest rate of FDI growth since 2012, up only 1.7% year-on-year.
“The steady internationalisation of renminbi means corporates are not only using it as a settlement currency, but also adding it to the list of options when they look to diversify their funding source,” said Jiang.
“More multinationals would use renminbi in M&A transactions because of a further easing of rules in cross-border lending and borrowing by the government as well as the continuing widespread use of the currency," she added.
Moreover, Jiang noted that more companies plan to tap the mainland market this year with so-called panda bonds, renminbi-denominated notes issued by non-Chinese issuers and sold onshore. She sees a strong likelihood that a few European issuers will raise onshore renminbi through panda bonds this year given there are less technical and regulatory obstacles for European companies than US corporates.
Last March, German auto maker Daimler issued the first and the only panda bond from a corporate for Rmb500 million.
“Renminbi-denominated funding can be an especially compelling option for companies who conduct a significant percentage of their transactions in or have income linked to the currency,” said Jiang.
In addition to financing, the survey found multinationals are also open to using renminbi to access new cross-border business opportunities (41%); broaden access to onshore buyers and suppliers (40%); and gain relationship advantages, such as receiving discounts (37%).
Global companies on the mainland sensed a business advantage when currency restrictions were eases, with 57% of the executives agreeing that the internationalisation of the currency has allowed more flexibility in setting salaries and benefits in China.
More than two-thirds of the companies represented in the poll said RMB internationalisation has led to restructuring of their global (71%) or regional (68%) supplier/vendor networks.
“The question to ask is not whether the renminbi is ready for the world," she said, "but whether the world is ready for the renminbi.”
