1. thecorporatetreasurer.com20 corporate treasurer June / JULY 2015
Managing
RMB volatility
The renminbi’s changing landscape demands
treasury departments stop assuming the currency
is a one-way bet. Ann Shi reports
2. thecorporatetreasurer.com June / JULY 2015 corporate treasurer 21
Renminbispecialfocus2015
A
fter seeing eight years of
stability and steady renminbi
appreciation against the
US dollar up to 2013, the
markets were caught by
surprise when, between January and
May 2014, the Chinese currency dipped
4% to Rmb6.26. The currency has been
bumping around ever since.
This two-way movement has intensified
treasurers’ focus, especially those who
are expecting to increase their usage of
renminbi for investment and operations.
Among 150 senior executives polled
from multinational corporates (MNC)
with renminbi exposures, headquartered
in the US, Europe and Asia-Pacific, 40%
of respondents cited the need for a new
renminbi hedging strategy as an obstacle
to greater use of the currency, according
to research conducted by The Economist
Intelligence Unit and Allen & Overy in
January this year.
To tackle corporates’ concerns, it is
worthwhile noting what is causing the
currency’s two-way volatility, and why it is
here to stay.
BEHIND THE VOLATILITY
There are domestic and international
factors contributing to renminbi’s two-way
movement. Domestically, the currency is
becoming more volatile because China’s
policymakers need to make it easier to use.
“China needs a more flexible currency
before the country can fully open up its
capital account without running the risks
of large and unmanageable capital flows,”
explained Louis Kujis, chief economist for
Greater China at RBS.
According to the People’s Bank of China
(PBoC), the country will further open up
its capital account to make renminbi a fully
convertible currency by the end of 2015.
More precisely, the renminbi’s volatility
is partly attributable to the widening of the
trading band by the PBoC. In March 2014,
it pushed the band against the US dollar
to 2% below or above the daily midpoint
exchange rate – up from 1%.
At the international level, economists
blame the European Central Bank with its
quantitative easing; interest rate cuts in
markets such as Switzerland, India, Turkey
and Canada; and a looming US interest
rate hike. This, they believe, has intensified
the volatility as other major trading
currencies’ value swing comparatively.
Exposed to these new currency risks, it is
surprising that not every sizeable company
has a hedging policy in place.
WHAT SHOULD I DO?
Tony Lam, the former Asia treasurer at
global coatings manufacturer Valspar,
recently recommended that his US treasury
headquarters, where all the group’s FX
hedging activities are centralised, review
its net FX exposures and reconsider the
need for hedging its renminbi income.
Lam said Valspar is not alone in not
having a policy in place – many US MNCs
are in the same boat and he believes this is
a cultural issue. When the dollar remained
weak, US MNCs like Valspar gained from
the “exchange game” of transforming their
renminbi income to dollars.
“But the renminbi landscape is
changing,” Lam said, “and I strongly
recommended [Valspar’s US headquarters]
review its hedging portfolio.” For
multinationals in Asia, he explained, it is
very natural to have a large proportion of
Asia income denominated in renminbi; in
Valspar’s case, the figure is more than 50%.
The currency is “in a dilemma”, Lam
explained. On the one hand, it is a market
consensus that China will increase money
supply to pump up its economy, which
in theory would weaken renminbi. On
the other hand, the government would
intervene when it becomes “too weak” so
as to not endanger its internationalisation
as foreign companies lose interest in
holding and using the currency.
WHAT THE Treasurers HAVE DONE
For renminbi early adopters, such as
Swedish multinational IKEA, renminbi
hedging is a routine practice.
Raj Rai, regional treasury manager
at IKEA Asia-Pacific and the managing
director of IKEA Asia Treasury Centre,
told The Corporate Treasurer all the FX
risks associated with renminbi are solely
managed by IKEA’s group treasury
headquarters in Brussels since the late
1990s. It uses offshore derivatives products,
such as non-deliverable forwards and non-
deliverable options for hedging.
In 2012, IKEA converted all of its
intra-group cross-border settlements
into renminbi, and then converted the
payments to third party service providers.
From September 1, 2012, IKEA started to
allow its third party goods suppliers to
send renminbi invoices.
In January 2012, IKEA used the
renminbi swap market for the first time
as a source of funding, with a five-year
renminbi-denominated bullet loan via
China’s foreign debt quota. Today, IKEA
China is nearly 70% intra-group funded
by loans from the renminbi swap market.
In this regard, Rai said, “we are finding
sizeable deals out to seven years from our
‘core’ banks”.
Rai said the high rate of intra-group
funding to China is provided by IKEA’s
own equity. As IKEA is cash rich, it can
swap euros into offshore renminbi outside
of China and create offshore-to-onshore
loans flowing into China.
Keep it simple
Not all companies need to operate such
sophisticated systems. Raphael Darbellay,
Manila-based head of global service centre
at FTSE 250 company Regus, told The
Corporate Treasurer. The company has an
“organic system”, with short-term inter-
company invoicing that leaves minimal
renminbi exposure when every monthly
cycle ends.
The office leasing company has
footprints in 120 countries, and covers
26 cities in China. China contributes to
around 25% of the company’s total Asia
income, said Darbellay.
Regus has a very simple business model.
It does not own any real estate properties;
instead it rents buildings from landlords
and leases them to customers, mostly on a
short-term contract basis.
The model means Regus does not own
any sizeable long-term debt, but mainly
deals with short-term cash flows. In every
city Regus issues invoices, mostly on a
monthly basis, and collect invoices within
a maximum of 30 days from its leasing
customers.
All the invoices are centralised for
settlement at its global service centre
in Manila by a specific unit of finance
department, and all the settlements are
netted off across all global entities on a
monthly basis, said Darbellay.
“Very naturally, as soon as a monthly
cycle ends, there should be no outstanding
trade invoices. This means our FX
exposures, not only to renminbi, but also
to other currencies, would be reduced to a
minimum on a monthly basis.”
As with all treasury strategies, each
has to work according to the nuances of
your company; the business model must
determine how you manage currency and
interest rate risk. To assume the renminbi
will always move consistently is highly
misguided. n
![thecorporatetreasurer.com June / JULY 2015 corporate treasurer 21
Renminbispecialfocus2015
A
fter seeing eight years of
stability and steady renminbi
appreciation against the
US dollar up to 2013, the
markets were caught by
surprise when, between January and
May 2014, the Chinese currency dipped
4% to Rmb6.26. The currency has been
bumping around ever since.
This two-way movement has intensified
treasurers’ focus, especially those who
are expecting to increase their usage of
renminbi for investment and operations.
Among 150 senior executives polled
from multinational corporates (MNC)
with renminbi exposures, headquartered
in the US, Europe and Asia-Pacific, 40%
of respondents cited the need for a new
renminbi hedging strategy as an obstacle
to greater use of the currency, according
to research conducted by The Economist
Intelligence Unit and Allen & Overy in
January this year.
To tackle corporates’ concerns, it is
worthwhile noting what is causing the
currency’s two-way volatility, and why it is
here to stay.
BEHIND THE VOLATILITY
There are domestic and international
factors contributing to renminbi’s two-way
movement. Domestically, the currency is
becoming more volatile because China’s
policymakers need to make it easier to use.
“China needs a more flexible currency
before the country can fully open up its
capital account without running the risks
of large and unmanageable capital flows,”
explained Louis Kujis, chief economist for
Greater China at RBS.
According to the People’s Bank of China
(PBoC), the country will further open up
its capital account to make renminbi a fully
convertible currency by the end of 2015.
More precisely, the renminbi’s volatility
is partly attributable to the widening of the
trading band by the PBoC. In March 2014,
it pushed the band against the US dollar
to 2% below or above the daily midpoint
exchange rate – up from 1%.
At the international level, economists
blame the European Central Bank with its
quantitative easing; interest rate cuts in
markets such as Switzerland, India, Turkey
and Canada; and a looming US interest
rate hike. This, they believe, has intensified
the volatility as other major trading
currencies’ value swing comparatively.
Exposed to these new currency risks, it is
surprising that not every sizeable company
has a hedging policy in place.
WHAT SHOULD I DO?
Tony Lam, the former Asia treasurer at
global coatings manufacturer Valspar,
recently recommended that his US treasury
headquarters, where all the group’s FX
hedging activities are centralised, review
its net FX exposures and reconsider the
need for hedging its renminbi income.
Lam said Valspar is not alone in not
having a policy in place – many US MNCs
are in the same boat and he believes this is
a cultural issue. When the dollar remained
weak, US MNCs like Valspar gained from
the “exchange game” of transforming their
renminbi income to dollars.
“But the renminbi landscape is
changing,” Lam said, “and I strongly
recommended [Valspar’s US headquarters]
review its hedging portfolio.” For
multinationals in Asia, he explained, it is
very natural to have a large proportion of
Asia income denominated in renminbi; in
Valspar’s case, the figure is more than 50%.
The currency is “in a dilemma”, Lam
explained. On the one hand, it is a market
consensus that China will increase money
supply to pump up its economy, which
in theory would weaken renminbi. On
the other hand, the government would
intervene when it becomes “too weak” so
as to not endanger its internationalisation
as foreign companies lose interest in
holding and using the currency.
WHAT THE Treasurers HAVE DONE
For renminbi early adopters, such as
Swedish multinational IKEA, renminbi
hedging is a routine practice.
Raj Rai, regional treasury manager
at IKEA Asia-Pacific and the managing
director of IKEA Asia Treasury Centre,
told The Corporate Treasurer all the FX
risks associated with renminbi are solely
managed by IKEA’s group treasury
headquarters in Brussels since the late
1990s. It uses offshore derivatives products,
such as non-deliverable forwards and non-
deliverable options for hedging.
In 2012, IKEA converted all of its
intra-group cross-border settlements
into renminbi, and then converted the
payments to third party service providers.
From September 1, 2012, IKEA started to
allow its third party goods suppliers to
send renminbi invoices.
In January 2012, IKEA used the
renminbi swap market for the first time
as a source of funding, with a five-year
renminbi-denominated bullet loan via
China’s foreign debt quota. Today, IKEA
China is nearly 70% intra-group funded
by loans from the renminbi swap market.
In this regard, Rai said, “we are finding
sizeable deals out to seven years from our
‘core’ banks”.
Rai said the high rate of intra-group
funding to China is provided by IKEA’s
own equity. As IKEA is cash rich, it can
swap euros into offshore renminbi outside
of China and create offshore-to-onshore
loans flowing into China.
Keep it simple
Not all companies need to operate such
sophisticated systems. Raphael Darbellay,
Manila-based head of global service centre
at FTSE 250 company Regus, told The
Corporate Treasurer. The company has an
“organic system”, with short-term inter-
company invoicing that leaves minimal
renminbi exposure when every monthly
cycle ends.
The office leasing company has
footprints in 120 countries, and covers
26 cities in China. China contributes to
around 25% of the company’s total Asia
income, said Darbellay.
Regus has a very simple business model.
It does not own any real estate properties;
instead it rents buildings from landlords
and leases them to customers, mostly on a
short-term contract basis.
The model means Regus does not own
any sizeable long-term debt, but mainly
deals with short-term cash flows. In every
city Regus issues invoices, mostly on a
monthly basis, and collect invoices within
a maximum of 30 days from its leasing
customers.
All the invoices are centralised for
settlement at its global service centre
in Manila by a specific unit of finance
department, and all the settlements are
netted off across all global entities on a
monthly basis, said Darbellay.
“Very naturally, as soon as a monthly
cycle ends, there should be no outstanding
trade invoices. This means our FX
exposures, not only to renminbi, but also
to other currencies, would be reduced to a
minimum on a monthly basis.”
As with all treasury strategies, each
has to work according to the nuances of
your company; the business model must
determine how you manage currency and
interest rate risk. To assume the renminbi
will always move consistently is highly
misguided. n](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)