Case Studies

  1. Exporting to China in RMB
  2. Importing from China in RMB
  3. Textile Manufacturer – Importer of Goods
  4. Pulp and Paper Producer – Exporter of Goods
  5. Aerospace Manufacturer – Multinational
  6. Mining Company – Multinational

Exporting to China in RMB

Canada exporter, China buyer

Original terms – USD denominated transaction

  • Chinese importer used to issue 90 days USD Letters of Credit (LC)
  • Chinese importer working capital requirement is 180 days
  • Difficulty in getting USD LC issued beyond 90 days due to Short Term Foreign Debt Quota (STFD)

Revised terms – RMB denominated transaction

  • Chinese importer issuing 180 days RMB LC. Ease of issuance as these LCs are not governed by STFD
  • Helped Chinese importer improve their working capital management and eliminate FX risk
  • Chinese importer is placing more orders with overseas exporter
  • Canadian exporter able to determine their costs upfront and plan contract negotiations
  • Canadian exporter able to add sufficient margins to their contract price

Importing from China in RMB

Canada importer, China seller

Original terms – USD denominated transaction

  • Canadian retailer buys from Chinese vendors
  • Purchasing Orders (POs) include cost plus FX margin

Revised terms – RMB denominated transaction

  • All payments switched in to RMB
  • Elimination of FX costs results in lower and transparent pricing from suppliers to the retailers
  • Improved relationship with Chinese vendors / greater market penetration for Chinese vendors into Canada

Textile Manufacturer – Importer of Goods

Business Challenge

  • Company A purchases from China throughout the year, with payments occurring on a bi-monthly basis. Since Company A has revenues in CAD, its current payment process involves a currency conversion from CAD to USD, with the US funds then being sent via wire payment to China.
  • The CFO has heard from members of his trade association that the RMB is becoming more accessible and is increasingly being used in cross-border trades. He is mindful that he is being charged an inflated USD price by his Chinese suppliers to account for their currency exposure risks. The CFO is eager to explore the possibility of paying his suppliers directly in RMB to ascertain if he can reduce his costs. He approaches his corporate banker to explore options.

Sector Background

  • The clothing manufacturing sectors represented nearly $3 billion of Canada’s imports from China in 2014, the third highest amount of imports of any sector.
  • Imports have grown at a compound annual growth rate of 1.67% over the last five years.

Solution

  • Company A takes on FX risk, paying suppliers in RMB, removing FX premium.
  • Company A purchases using a spot trade or a hedging product.

Outcomes

  • Company A has been able to establish better procurement terms with Chinese suppliers.
  • Improved payment flexibility means that Company A can expand suppliers.
  • Cost savings have resulted in improved competitiveness and customer satisfaction.

Next Steps

  • Open RMB account in Canada.
  • Complete bank documentation.
  • Change internal systems, such as for invoicing, to manage RMB.

Source: Textile Manufacturer – Importer of Goods. AdvantageBC, RMB Toolkit.

Pulp and Paper Producer – Exporter of Goods

Business Challenge

  • Company B is a BC-based manufacturer of forest products. While the United States continues to be its primary market, its exports to China have grown significantly in the past decade.
  • Company B’s Chinese buyers have expressed a desire to settle in RMB.

Sector Background

  • China is an important customer for the pulp mills and sawmills industries, which exported nearly $4.2 billion of goods to China in 2014, making it the largest Canadian exporting sector to China.
  • China is the second largest importer of Canadian pulp and paper, after the United States.

Solution

  • Company B opened RMB account in Canada to receive RMB payments.
  • Company B set up internal processes to enable trading in RMB products.

Outcomes

  • Company B likes that it can provide its customers flexibility as paying in dollars or RMB depends on the domestic rate of borrowing and the ease of access to the currency.
  • Company B can get a higher rate of interest on RMB deposits than USD or CAD.

Next Steps

  • Open RMB account in Canada.
  • Adjust internal processes.
  • Research and discuss investment alternatives with financial advisors.

Source: Pulp and Paper Producer – Exporter of Goods. AdvantageBC, RMB Toolkit.

Aerospace Manufacturer – Multinational

Business Challenge

  • Having seen an increase in sales in aerospace products and parts, Company D switched to RMB invoicing in 2012 and manages its RMB exposure in the same manner as any other currency.
  • Now comfortable with the amount of liquidity in the offshore RMB market, Company D wants to improve on how it manages its intercompany loans between its central treasury and its subsidiary in China on a corporate basis to avoid taking out loans with a third party.

Sector Background

  • The aerospace product and parts manufacturing industry is important to Canada’s manufacturing sector, contributing $27.8 billion to Canada’s GDP and employing 172,000 people in Canada in 2013.
  • It is also a top 10 exporting industry to China, with nearly $500 million in exports to China in 2014.

Solution

  • Company D applied to SAFE for a quota.
  • Company D has put cross-border RMB pooling in place between its central treasury department and its subsidiary in China.

Outcomes

  • Financing costs have gone down.
  • It is easier to move money in and out of China – less paper work and reduction in manual processes.
  • It has created greater flexibility to make payments to suppliers in RMB, pay employees and make investments.

Next Steps

  • Open RMB bank account in Canada.
  • Access RMB liquidity and investment options.

Source: Aerospace Manufacturer – Multinational. AdvantageBC, RMB Toolkit.

Mining Company – Multinational

Business Challenge

  • Although financing is still done mainly in USD, Company C recognized the strategic importance of using RMB and in 2012 it opened RMB accounts in Singapore and London. It has done some transactions, however time zone differences have made it somewhat difficult to manage from a cash management perspective.
  • Now that there is a Canadian hub, Company C wants to manage risk at its head office in Canada.

Sector Background

  • Canada’s mining industries exported over $3.1 billion of goods to China in 2014, the second largest amount of exports to China of any sector.

Solution

  • Company C made a strategic decision to concentrate and manage its risk in Canada.
  • Company C opened a RMB account in Canada to receive RMB payments.
  • Company C set up internal processes to enable trading in RMB products.

Outcomes

  • RMB is now used for inter- company trade and to pay external suppliers, reducing costs.
  • It is easier to net exposures and establish better procurement terms.
  • The decision allows for diversification of assets.

Next Steps

  • Open RMB bank account in Canada.
  • Change internal systems and invoicing.
  • Access RMB liquidity and investment options.

Source: Mining Company. AdvantageBC, RMB Toolkit.

Disclaimer: The facts presented in the case studies are illustrative only. TFSA does not warrant the quality, accuracy, or completeness of the information 

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