Henri Malvet

11.2.2016

How to benefit from trade in Chinese yuan?

Case Finnish import company

• The use of Chinese yuan is growing globally

• Why?

• Customer case: Reima Oy

• CNY/CNH payment practicalities

• Summary

2

Chinese yuan as international payment currency - explosive growth recent years; Nordea started trading in spring 2011

Source: SWIFT RMB Tracker, Customer initiated and institutional payments. Messages exchanged on SWIFT. Based on value.

European companies increase the use of yuan

• HSBC-bank made a survey in July 2014, and found

– German and French companies are those using yuan most in their foreign trade, outside ”Greater China” (Mainland-China, Hong Kong and Taiwan)

– Over 1.300 companies participated in the query, all having trade with China

– 26% of the French and 23%% of the German companies settled their trade in yuan

• Nordea’s Nordic customers are following suite…

4

• Apparently they are benefiting somehow from the use of yuan..?

• The use of Chinese yuan is growing globally

• Why?

• Customer case: Reima Oy

• CNY/CNH payment practicalities

• Summary

5

Foreign trade in EUR or USD vs. trade in local currency

• Many Finnish companies are using euro in their trade with China

– An usual argument is: ”Use of EUR eliminates the currency risk”

– Or is it actually eliminating?

• Foreign trade with counterparts outside the euro area includes always a currency risk

• Foreign trade in EUR doesn’t eliminate the currency risk – it only transfers it to the Chinese counterpart

• Two aspects of the risk:

1. Transaction costs of the Chinese counterpart

2. Currency risk to be taken by the Chinese counterpart

• A central question: how does these two elements affect the price in euro?

6

Which factors form the final price paid?

• When the Chinese company receive euro, they have to convert them to CNY in a local bank

– The transaction cost is usually higher than if the conversion was to be made in Finland

– The local bank might be a smaller bank, offering not so favourable exchange rates

• The Chinese company bears the currency risk, coming from the EUR movements against CNY –hedging the risk in a cost efficient way might be close to impossible to the Chinese company

– The natural reaction from the Chinese company is to mitigate / ask for compensation for taking the risk

– A “risk premium” is added to the price in EUR, to safeguard that the Chinese seller is staying profitable, irrespective of negative currency fluctuations

7

EUR price Price in local

currency Transaction cost Risk premium + +

The price calculated in CNY is more transparent and could offer cost savings for the Finnish importer, as the transaction costs for the Finnish company are probably lower and hedging the

currency risk in Finland is probably more cost efficient

• The use of Chinese yuan is growing globally

• Why?

• Customer case: Reima Oy

• CNY/CNH payment practicalities

• Summary

8

• Before implementing yuan invoicing they often experienced:

– EUR or USD based invoicing caused trouble for the Chinese companies

– They had no experience of handling currency risks

– Longlasting USD/CNY peg gave false sense of security

– Before July 2005 CNY was pegged to USD for abt. 10 yrs to the rate 8.27, same during finance crisis but now to 6.83

– Suddenly FX fluctuations came as a total surprise for the Chinese manufacturers

– Increased volatility caused pain, when translated into falling revenues and diminishing profitability

A positive example: Case Reima*

9

• The wellknown Finnish maker of childrens garments Reima Oy have been active for years on the Chinese market , they have a long experience of using the local currency

*Nordea has a marketing agreement with Reima Oy

• How did the Chinese companies try to improve the situation?

– Incresed use of home made ”hedging” mechanisms; currency clauses and currency corridors

– Pricing in USD was overly cautios and time consuming

– The risk for a strengthening CNY made suppliers adjust prices upwards – pricing transparency suffered severly

The choice of CNY as invoicing currency has made business easier

The negotiations between Reima Oy and the Chinese suppliers are going more smoothly

Suppliers pricing- and decision-making processes has speeded up

In price negotiations Reima Oy has been able to insist on more favourable terms & conditions

In Finland the offering of hedging instruments is broader and use easier; hedging currency risk thus more cost efficient

A positive example: Case Reima

10

• Reima Oy reacted by changing invoicing currency to CNY:

• The use of Chinese yuan is growing globally

• Why?

• Customer case: Reima Oy

• CNY/CNH payment practicalities

• Summary

11

The use of CNY as payment currency to China

• Payments in CNY can be made from EUR or USD accounts

• The rate is detemined at the moment of the FX deal, when buying cover for the payment

• Payments can be submitted

1. Through most bank software tools

2. As single payments of file transfers

• Check, that the receiving account is CNY-denominated; that the Chinese company is eligible to receive CNY payments from abroad

• The invoice must always be in CNY, even if routed via Hong Kong with CNH cover

• Note! Only CNY is a SWIFT currency!

12

Payments to and from Mainland China - two options available Works both ways

13

Finland

Finnish company

CNY

Bank of China*

Chinese company

Standard Chartered

Bank*

Hong Kong

CNY Conversion of CNY/CNH/CNY 1:1

Bank of China

Mainland China

CNH

CNY

Via CNY channel in SWIFT

Via CNAPS

*Nordea’s nostro/account banks in HK and Mainland China

For all other payments than goods, CNH must be used (services, fees, dividends, royalties, licences etc. - but works also for payment of trade in goods)

14

Finland

Finnish company

Bank of China*

Chinese company

CNH

Standard Chartered

Bank*

Hong Kong CNY

Conversion of CNY/CNH/CNY 1:1

Bank of China

CNY

CNY

Mainland China

*Nordea’s nostro/account banks in HK and Mainland China

Via CNAPS

Via CNY channel in SWIFT

The yuan FX risk is handled like in any other currency

• The FX risk of the Chinese yuan can be handled like in any currency

• The instrument for CNY is an NDF Forward

– An Non Deliverable Forward is like any other forward, but instead of delivery of the currency at maturity, only the forward and market rate differential is settled in EUR or USD (cash settlement)

– The NDF forward rate is determined like for ordinary forwards through the interest rate differential, but here also supply and demand and market sentiment can affect the price

– The market is very liquid; prices up to 5 yrs

• In CNH there are ordinary forwards and options

15

• The use of Chinese yuan is growing globally

• Why?

• Customer case: Reima Oy

• CNY/CNH payment practicalities

• Summary

16

1. Strong movements in the yuan rate has been seen recent years

• Peoples Bank of China / The Central Bank will allow more market determined movements in the future

2. FX conversion and hedging the currency risk is often expensive in local Chinese banks

• The Chinese counterpart is forced to pay the transactions costs and thus consider a “risk premium” to the original price for the goods – in this case it would probably mean a higher total price for the goods, if calculated in EUR

3. The Chinese company could also benefit from invoicing and getting paid in CNY

• No more worries for unexpected exchange rate fluctuations

• The company’s revenues and costs will be in the same currency

• More predictable cash flow in the company => increased profitability?

• Possible growth in sales?

Summary

17 •

These factors combined make yuan based invoicing and CNY

payments a cost efficient alternative for both the Chinese and Finnish counterpart

Thank you!

Henri Malvet EM Business Coordinator

FX Solutions +358 9 369 50 150

henri.malvet@nordea.com

Nordea Markets on Nordea Bank Norge ASA:n, Nordea Bank AB:n

(publ), Nordea Pankki Suomi Oyj:n ja Nordea Bank Danmark A/S:n

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