Executive Summary:  Recently, as part of its foreign exchange reforms, the People’s Bank of China signed a bilateral currency swap agreement with the Reserve Bank of Australia.  This report discusses the currency swap agreement and the introduction of PRC laws relating to the internationalisation of the RMB.

MAIN ARTICLE

• Background
• The currency swap agreement
• Major PRC regulations concerning RMB internationalisation
• Conclusion

How does it affect you?

•  In line with the objectives of China’s 12th Five Year Plan, the execution of the Australia-China currency swap agreement is an important step for the Chinese Government’s foreign exchange reform and the expansion of cross-border use of RMB.
•  The currency swap agreement will increase opportunities for Australian companies to settle trade between the two countries in RMB and make RMB-denominated investments.
•  For companies conducting bilateral trade and investment between China and Australia, the currency swap agreement may present new opportunities to effectively avoid exchange rate risk and reduce conversion costs by settling or investing in RMB.

Background

It is widely believed that RMB internationalisation is an inevitable long-term trend. According to press reports, in 2011, the PRC’s cross-border RMB trade settlement had grown by more than 400 per cent on a year-on-year basis and accounted for approximately 10 per cent of China’s total foreign trade amount. HSBC estimates that, by 2015, RMB will become one of the top three trade settlement currencies.

Since 2009, the PRC Government has formulated various regulations in relation to RMB settlement of cross-border trade and RMB-denominated foreign investment.

To date, the PRC Government has signed more than 20 bilateral currency swap agreements with other countries. However, the currency swap agreement with Australia is the first that China has signed with a developed economy and it is therefore a significant development.

The currency swap agreement

The People’s Bank of China (PBOC) and the Reserve Bank of Australia (RBA) signed the bilateral currency swap agreement on 22 March 2012. The agreement allows exchange of local currencies between the two central banks of up to A$30 billion or RMB 200 billion. It is for an initial period of three years.

China has become Australia’s largest trading partner and the largest export market for iron ore, coal and gas. PRC enterprises are active in investing in Australia, particularly in the energy and resources sectors.

According to the RBA’s media release, the main purposes of the swap agreement are to support trade and investment between Australian and China, particularly in local-currency terms, and to strengthen bilateral financial cooperation. The swap agreement reflects the increasing opportunities available to settle trade between the two countries in RMB and to make RMB-denominated investments.

According to an official of the RBA, under the currency swap agreement, an Australian importer may contract with a PRC exporter in RMB and the RBA may acquire RMB under the swap agreement and lend it to the Australian importer’s bank. Given the existence of this swap agreement, Australian importers would be more confident in contracting in RMB than previously. The RBA official also confirmed that the swap agreement may be used for other purposes (eg cross-border investment), if agreed to by both the RBA and the PBOC.

Details of the agreement are not available to the public

Major PRC regulations concerning RMB internationalisation

The PRC Government has promulgated a number of regulations in respect of RMB internationalization since 2009. Details of such regulations (particularly the inbound/outbound investment related regulations) were set out in our previous Focus: Liberalising cross border investment in RMB. For the purpose of illustrating the ‘step by step approach’ taken by the PRC Government to achieve RMB internationalisation, which is the background of the aforementioned currency swap agreement and the clear thread in all of the trade and inbound/outbound investment related regulations, we set out below a brief summary of the key features of some milestone regulations in chronological order.

Trade-related regulations

Measures for the Administration of Trial Program of RMB Settlement in Cross-Border Trade (the measures).

The measures were jointly promulgated by the PBOC, the Ministry of Finance (MOF), the Ministry of Commerce (MOC), the General Administration of Customs (GAC), the State Administration of Taxation (SAT) and the China Banking Regulatory Commission (CBRC) on 1 July 2009.

The measures unveiled the ‘trial program’ of cross-border RMB trade settlement between:

•  certain regions (ie Shanghai and four cities of Guangdong province) of mainland PRC; and
•  Hong Kong/Macau/ASEAN states.

According to the measures, enterprises that are located in such regions and approved by the state may settle cross-border trade with overseas enterprises in RMB. The ‘approved’ enterprises may conduct RMB settlement either through commercial banks in Hong Kong or Macau who are permitted to conduct RMB business or through commercial banks in the mainland PRC acting as agents of overseas commercial banks.

Notice on Issues Relating to the Expansion of the Trial Program of Cross-Border Trade RMB Settlement.

This notice was promulgated by the PBOC, the MOF, the MOC, the GAC, the SAT and the CBRC on 17 June 2010.

It extended the geographical coverage of the ‘trial program’ of cross-border RMB trade settlement. Under the notice, RMB settlement is permitted for cross-border trade between enterprises in:

•  20 provinces/autonomous regions/central government administered municipalities of the mainland PRC; and
•  all overseas countries and regions.

In August 2011 it was further extended to the whole of mainland PRC.

Notice on Issues Related to RMB Settlement of Cross-Border Trade Conducted by Services Outsourcing Enterprises.

This notice was promulgated by the General Office of MOC and the General Office of PBOC on 22 October 2010.

It specified that outsourcing services enterprises of the PRC may conduct RMB settlement for the provision of outsourcing services to overseas customers.

Inbound investment-related regulations

Notice of the MOC on Issues Relating to RMB Foreign Direct Investment.

This notice was released by the MOC on 12 October 2011.

It permitted foreign investors to invest in the PRC by using their legally obtained overseas RMB funds. In summary, foreign investors can legally obtain overseas RMB funds by:

•  settling cross-border trade in RMB;
• issuing RMB bonds or RMB shares outside of the PRC or legally obtaining RMB outside of the PRC through other avenues; or
• obtaining RMB funds in the PRC according to law (mostly derived from the foreign invested enterprises set up in the PRC by such foreign investors) and remitting such RMB funds out of the PRC.

Foreign investors must provide evidence or documents to the MOC (or its local branches) to prove the legality of how the overseas RMB funds were obtained.

The overseas RMB funds must not be directly or indirectly invested in securities or financial derivatives in the PRC, except in a few special circumstances. Nor can such RMB funds be used to provide entrusted loans (ie lending funds to PRC entities through a bank acting on behalf of the lender) to other entities in the PRC.

Outbound investment-related regulations

Measures for the Administration of the Pilot Scheme for Settlement of RMB for Overseas Direct Investment.

This measure was promulgated by the PBOC on 6 January 2011 and enables PRC entities to use RMB in overseas investment projects (including greenfield investment, M&A or acquisition/subscription of shares in overseas companies).

Conclusion

The execution of the currency swap agreement between China and Australia is widely perceived as a significant step towards the internationalisation of the RMB.

The summary of the relevant PRC regulations set out above demonstrates the PRC Government’s intention to expand the use of the RMB in cross-border trade and investment, which is also an inevitable trend given the growing economic strength of the PRC.

Australian companies should be aware of these developments and evaluate the implications and opportunities presented to them under the currency swap agreement and the relevant PRC regulations.