Paying in Local Currency
Here are a few key considerations:
Businesses in most countries prefer to transact in their own currencies, and China is no longer an exception. A recent Western Union survey of more than 1,000 mainland Chinese companies revealed that more than 36% prefer to receive payments in renminbi.
Quantify the Benefits
Paying in renminbi can be good for the bottom line. When Chinese companies handle the currency conversion process themselves, they incur additional costs doing so, and those costs are often invisibly passed on in the form of higher invoice prices. Our research has shown that on average, exporters add a surcharge of 3% to cover FX risks and costs; letting your business partners know that you can pay them in the renminbi could result in cost savings.
Speed is of the Essence
In our experience, CNH payments are received much more quickly than their USD equivalents. For businesses, this is a key advantage - speeding up the settlement cycle can help optimize cash balances and dramatically reduce back-end processing costs.
Communication is Critical
Our research also indicates that many Chinese exporters believe their foreign partners are unable or unwilling to pay in renminbi, so they rarely broach the subject proactively. Simply opening the discussion can deliver financial benefits - and deepen relationships.
Keep It Simple
In many cases, receiving renminbi instead of dollars can help onshore partners streamline customs declaration procedures and reduce reporting requirements. Talk to beneficiaries about the processes that must be put into place in order to support this.
Don't Reinvent the Wheel
Building and maintaining a network of banking relationships in China is difficult and complex. Think about working with a currency provider that can achieve economies of scale, delivering access to a range of incoming and outgoing payment facilities without burdening the business with unnecessary costs.
Renminbi Movement is No Longer a One-Way Street
The renminbi has risen steadily against the US dollar for many years. However, this cannot be safely extrapolated into the future. As China's growth model changes and markets assume a greater role in setting the exchange rate, the renminbi will become much more volatile. Consider using forward contracts to add predictability to cash flows.
Beware Hidden Exposures
Settling transactions in US dollars does not make foreign exchange risk disappear; it simply makes it more difficult to control. If the renminbi rises in value, US dollar costs will also rise. Non-deliverable forward (NDF) contracts can help to protect against swings in the renminbi exchange rate over longer time horizons.