04 February 2014, Global Connections

Trade benefits from embracing RMB

Doing business with suppliers in different countries can create currency issues for both sides. For Nasco Trading, an engineering firm sourcing materials from China, the solution was to embrace the renminbi.

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Nasco Trading is an SME active in the engineering sector in the UAE. Since 1992 the company has supplied items such as elevators, door operators and barriers for building projects in the Emirates. While the company has suppliers all over the world, including Germany, Italy, Spain, Turkey and the US, some 70 per cent of the company's purchases originate in China.

Despite extensive supply contracts in China, Nasco's settlement currency was US. This isn't the home currency for the company or for its suppliers. "Every time I used to negotiate with my suppliers, they would convert into dollars," says Avinash Valrani, managing director at Nasco Trading. "In doing this they were keeping a buffer - the rate they would take was more than the currency rate at the time."

As the Chinese suppliers were pricing higher to cover against foreign exchange risk, the additional cost for Nasco was considerable. "Against this background, HSBC brought a solution to Nasco that benefitted both the company and its suppliers," explains Yannis Koufopoulos, manager, trade sales for Business Banking in UAE at HSBC.

Finding a solution

The solution was to bring the renminbi (RMB) into the mix. "Before I went to China on a procurement trip, I spoke with HSBC about issuing letters of credit in RMB," says Valrani. "They presented this as an option to my foreign exchange problem, which is how I began invoicing in RMB."

Cooperation across the Bank was important for this solution. "To implement this solution there was great support from Trade Operations and excellent cooperation with the relationship manager," says Aditya Coondoo, Relationship Manager in UAE at HSBC. "We worked together as a team."

Nasco’s solution had three key elements:

  1. Nasco, through HSBC, issued a documentary credit in RMB to its suppliers, in order to import goods from China.
  2. Nasco borrowed funds through a clean import loan once the documentary credit had been issued to bridge the payment of the credit prior to invoicing.
  3. Nasco entered into an RMB foreign exchange forward contract to hedge the transaction.

This allowed Valrani to ask his suppliers for payment terms in RMB, rather than dollars. "I spoke with my relationship manager and it was simple and straightforward," says Valrani. "I got my pro forma invoices in RMB, opened the documentary credits in RMB, and by doing this I saved up to 5 per cent in every trade transaction as my suppliers no longer kept a buffer."

Like other currencies used in trade, the RMB is subject to fluctuations in value. For Nasco, however, the savings that the company made by switching to issuing documentary credits in RMB were worth the risk of adopting the new currency. "We did lose about 2 per cent due to currency fluctuations in our last two letters of credit," says Valrani. "However, this was ok for us because of the gains we were making by using RMB instead of US dollars. If you add this to the 5 per cent saving from my suppliers no longer imposing a currency buffer, we have made 8 per cent back on these initial L/Cs. This is a big difference for us."

Benefits for both sides

The switch to RMB can offer companies many benefits as well as providing their suppliers with advantages. The supplier no longer has FX risk to deal with as it is dealing in its local currency. Switching to RMB also strengthens the relationship with suppliers. In Nasco's case, Valrani was able to speak directly with his suppliers, foregoing any agents or middlemen that are common in cross-border multi-currency trade agreements.

While Valrani was visiting the suppliers in China, he was also able to arrange a conference call so that HSBC could speak to suppliers directly to ensure all parties understood and were comfortable with the RMB proposition. This gave Valrani's suppliers peace of mind that they could trade with Nasco in RMB without taking any FX risk and thus greatly simplifying the transaction. "By operating in RMB, it gives our business a competitive advantage in China," says Valrani.

Looking to the future

Nasco initially trialled RMB invoicing on a limited set of procurement contracts, but the benefits have convinced the company to roll out the strategy for all purchases in China. "We should complete the roll-out in around four months," explains Valrani. "I initially did this to see how it went. The results have been really good - it is easy to implement and it saves me money - so it is now a key business strategy for us."

Disclaimer: This article is not intended to constitute any advice or an offer. Any forecasts or projections are indicative only. HSBC or any of its affiliates accepts no liability, whether express or implied, arising out of or incidental to contents forming part of the article.

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