RMB settlement for paying Chinese suppliers

The possibility to pay Chinese suppliers in RMB is a recent development that importers should be aware of.

Last week I attended an excellent seminar organized by the French Chamber of Commerce in Hong Kong. RMB settlement was a hot topic.

There are no restrictions at all for Hong Kong-based companies to convert their dollars or euros into Chinese yuan (RMB), and to pay Chinese supplier directly in that currency.

An HSBC representative told the audience that most importers, including many of the largest ones, are not fully aware of the current situation.

The finance director of Tesco Int’l Sourcing explained that they decided to settle their invoices with Chinese suppliers in RMB mainly for three reasons:

  • It allows for more transparency on the evolution of the supplier’s costs (no currency effect),
  • Suppliers bet that the RMB will go up faster than will actually does. If the buyer has different expectations, then he should pay in RMB.
  • Chinese suppliers are happy to get RMB rather than USD. If they get USD, they need to pay the change and they need to wait for 7-10 days to get the cash in RMB.

He also noted that it takes time to switch a purchasing organization to settle in RMB:

  • Internal processes need to be modified,
  • The staff needs to take new habits (example: asking for dual quotes in USD and RMB).

Has anybody got an experience with RMB settlements?

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Comments

  1. Laura says

    We tried approaching our suppliers about paying in RMB and they told us they were not interested because they could not get tax rebates if they were paid in RMB but could get the rebates if we paid in USD or other foreign currency.  Has anyone else encountered this? 

  2. Mike Bellamy says

    Renaud,
    Your readers may be interested to learn that in my experience the PRC based banks have better RMB exchange rates and slightly better RMB savings rates than in HK.  In the case of my company (PassageMaker http://www.PSSchina.com) we recieve the USD and EURO and AUD to our HK accounts at HSBC HK then convert into RMB by sending to our mainland China operations’ account in PRC. Since our pricing is often quoted in RMB from the suppliers, this is kind of like a one way hedge, meaning that since I swap into RMB right away, if the RMB gets stronger, I am not hurt.  Since the RMB, for the most part, is on a one way path getting strong and stronger, so far this SOP above has saved me some money.  But it works because i have operations in both PRC and HK. Setting up in PRC is far more complex than HK, so for some buyers the better RMB rates in PRC may not justify the expenses and headaches of setting up a PRC entity.

    Laura,
    I have not run accross the problem you mention below and have found most suppliers prefer RMB.  I wrote some posts a while back explaining the smoke and mirrors around VAT in China. You may enjoy it  http://chinasourcinginfo.org/?cat=0&s=VAT+smoke+and+mirror   I bet there is a hidden reason other than VAT rebate for why they don’t want to quote in RMB.  Let us know if you get to the real reason.

    Best Regards,
    Mike Bellamy

    • Laura says

       Thank you for the links Mike, I am not giving up on this because I see huge potential for savings if my company can proceed in this way.

  3. Ameen says

    many occasions we pay by RMB and i feel this can give u a better negotiation position and we can achieve better pric results

  4. says

    Every supplier has  a different way they would like to be paid.  So
    it is very important during negotiation to talk with your supplier
    about who will support the risk of the currency exchange rate
    changes.  When we create long contract for ODM production for the
    members of our alliance (www.eyo-alliance.com), the
    negotiation of the price in RMB for product and manpower made in
    china is better for the supplier.  However, they often want to be
    paid in US Dollar.  You need to know that 1 US dollar to RMB today
    may be at a 6.36 exchange rate but perhaps by the end of the year
    will be at a 6.12 to 6.20 exchange rate. 

    For example, at the time of writing a contract the suppliers price
    may be 6,300 RMB but they want to be paid in US Dollars.  At the
    time of signing the contract that rate of currency exchange could be
    6.3 and would equal $1,000 US Dollars.  However, the supplier knows
    that the rate of exchange may increase so they will try to negotiate
    a 2-5% increase in the total price that could bring the price to
    $1,050 US Dollars. You have to manage this risk on your side and ask
    to your supplier to remove this percent from their price.

    These negotiations can be quite hard, but we have the experience
    needed in China to make these kinds of negotiations. In general if
    you run a monthly offer and you have a price negotiated for one year
    you need to pay close attention to the RMB to USD conversion rate. 
    From JUNE 2011 to JUNE 2012 the high could be 6.50 and the low can
    be 6.28 = 3.5% that can impact your reduce your margin a lot.  So be
    careful.

    Bests regards.

    Gaetan

    • says

      Thanks Gaetan for sharing your experiences. You are right, Chinese suppliers add a few percentage points when they are paid in USD, simply to anticipate a probable drop of the USD/RMB exchange rate.

  5. Ron says

    Above you say “There are no restrictions at all for Hong Kong-based companies to convert…”. Will this also work for foreign based companies with a HK bank account?

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