Renminbi settlement in euro-area trade: the hedging arithmetic for importers

For two decades the default currency of Sino-European trade was the dollar, with the euro a distant second. Neither party’s domestic currency was involved, which meant both parties carried an exposure to a third and both priced it in. That default is eroding. Chinese exporters — encouraged by policy, by improved settlement infrastructure and by their own treasurers — increasingly offer renminbi invoicing, and some now quote a visibly better price for it.

European importers have tended to decline, for reasons that are more about habit and policy than about economics. The economics deserve a fresh look, and from our markets desk the answer is often that renminbi settlement, properly hedged, is the cheaper option.

Who is carrying the currency risk?

When a Chinese supplier quotes in dollars or euro, it is carrying a currency exposure between the quote and its own renminbi costs, and it is pricing that exposure into the quote, whether explicitly or through a margin buffer. When it quotes in renminbi, it is not. The importer should therefore expect a lower price, and where the supplier does not offer one spontaneously, should ask for it. The size of the discount varies with the supplier’s own hedging sophistication and margin, but it is rarely zero and is frequently larger than the importer’s cost of hedging.

That cost is the other half of the arithmetic. Offshore renminbi forwards, priced predominantly out of Hong Kong, are liquid and competitively priced at the one- to twelve-month tenors that dominate trade payables. The forward points reflect the interest differential and have recently been favourable to a euro-based buyer of renminbi forward. The all-in cost of locking the landed cost in euro is, for most importers, a fraction of a percent.

A supplier invoicing in its own currency has stopped charging you for its hedge. The question is whether your own hedge costs less than the discount, and at trade tenors it usually does.

China Everbright Bank Europe — Financial Markets Desk

Offshore, onshore and the fixing

There is one technicality that matters more than the rest. The renminbi trades onshore and offshore at rates that are usually close and occasionally not. A commercial contract that specifies renminbi settlement should state which fixing determines any conversion — in practice, which reference rate and which time — and the importer’s hedge should be struck against the same reference. Hedging offshore against an invoice that converts at an onshore fixing leaves a residual basis exposure that is small in normal conditions and not small in stressed ones.

• Negotiate the renminbi discount explicitly; do not assume the supplier has passed on the full saving.
• Hedge with offshore forwards at the invoice tenor, struck against the fixing named in the contract.
• Update the treasury policy to admit a third currency with its own limits and approved instruments.
• Where volumes justify it, open a renminbi account so that timing mismatches between invoice and hedge can be absorbed rather than closed out.

Policy, not plumbing, is the constraint

Settlement itself is no longer the obstacle. Renminbi payments clear through the dedicated cross-border system and through correspondent arrangements that most European banks, including ours, maintain. What stops importers is more often an internal treasury policy written for a two-currency world, with no limit structure, no approved instruments and no accounting procedure for a third. Updating the policy is an afternoon’s work; leaving it as it is costs a discount on every invoice.

As the European subsidiary of a Chinese banking group we sit naturally at this intersection: renminbi accounts and payments for European importers, offshore and onshore hedging, and a view of both ends of the transaction. The advice is simple enough to fit in a sentence: do the arithmetic, and let the arithmetic decide the currency.