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More companies than ever before are now paying their suppliers in China in CNY. This used to be a complex process and in many cases suppliers were reluctant to accept CNY, but this has changed radically over the past 18 months, especially as the Yuan is becoming a major currency.
A shift from emerging market to major currency
For many years the Chinese government has campaigned to have the Yuan recognised as a major currency, which, in the long term, could take away from the dominance of the Dollar as the world’s leading currency. The international community has, in return, asked China to open up its economy more and increase transparency.
In November the IMF gave the Yuan reserve currency status, recognising it as a major currency, effective October 2016.
The Yuan is currently able to rise or fall from a daily reference rate set by the People’s Bank of China. The limit is set at 3% against major currencies other than the US Dollar and 2% against the Dollar. This band will, in time, be widened as the Chinese authorities pursue a managed floating exchange rate regime based on market demand and supply.
Here’s why you should ask for dual invoicing
Suppliers frequently offer clients a lower price when they offer to pay in CNY. That is because a USD invoice includes a mark-up, which can be as high as 5%, for the suppliers’ foreign exchange cost and risk.
By managing your currency risk yourself, you’re in control - you choose a financial services provider that gives you competitive exchange rates and you can take advantage of favourable market moves while managing your risk with a combination of spot transactions and flexible forward contracts, for example.
Recent USD/CNY volatility
Source: Thomson Reuters Datasteam Date: 26/02/2016
Due to the recent devaluation and depreciation of CNY, your supplier would receive 4% more CNY for each USD you pay, and therefore you’re in a stronger position to negotiate a lower price for the goods.
Paying in CNY is likely to be regarded as a commitment to your suppliers. It shows that you’re thinking about the relationship you have with them and that you’re in it for the long term. This may pay off when you need some flexibility from them.
There’s nothing to lose
Have a conversation with your suppliers and explore whether there are gains to make.
Chances are that your suppliers are already licensed to receive CNY payments. Typically this is part of the process when suppliers register their business with their local bank.