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ASIA: "India’s Draft Direct Taxes Code Bill 2009: Is the Mauritius Route Dead?" article

ASIA: "India’s Draft Direct Taxes Code Bill 2009: Is the Mauritius Route Dead? article. Article by Deloitte.

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backASIAtalk May, 2012

The RMB is coming. Is your company prepared?

As China loosens the controls on its currency, North American companies will need to sharpen their competitive tactics.

Weekly announcements in China underscore the country’s commitment to make the renminbi (RMB) fully convertible. Within China there are a number of strategic reasons for moving in this direction. These include positioning the RMB to ultimately serve as a reserve currency, promoting exports, reducing the burden on the central bank of holding large amounts of US dollars in reserve, and rationalizing capital flows.

The immediate commercial impact of this liberalization may not be apparent at an operational level to a company’s management. But it is critically important to realize that each policy change to loosen control and promote the use of RMB creates new opportunities and challenges for companies in their China operations, as well as in their home and offshore markets.

UnionPay, China’s version of the Plus system, has announced that the value of overseas goods and services purchased by Chinese consumers in 2011 was 300 billion yuan (US$47.5 billion). Union Pay also noted that many Chinese citizens prefer to pay for items in cash when they are travelling, so the total expenditure last year by Chinese abroad was probably significantly higher.

This emerging consumer demand, directed mainly at high-end brands and outlet stores, requires companies to review how to deploy advertising and branding resources. Chinese spending in the branded luxury product market is also maturing into keen interest in offshore real estate and investment assets.

The China Securities Regulatory Commission has also announced that it raised the quota amount for Qualified Foreign Institutional Investors as part of a national commitment to liberalize cross-border capital flows. This could force international fund management companies, pension funds and equity funds aiming to compete globally to increase their presence in China.

Parallel with these changes, China is clearly committed to expanding the off-shore asset portfolios of its own national security and savings fund, mutual funds and insurance companies. This will ultimately create increased opportunities for investment banks, both at the institutional and retail level, to sell shares of off-shore companies to the China market.

The expanding scope of currency swaps in RMB, the growing role of China’s The Export-Import Bank in funding exports and China Development Bank in providing financing to international projects is creating well-financed competitors in the CIVETS countries, as well as Europe and North America. This will put pressure on North American exporters to get more commercial support from their banks or rely further on agencies like the Export-Import Bank of the United States or Export Development Canada.

The Wall Street Journal, Reuters and Bloomberg are reporting the changes taking place in China’s foreign exchange system in real time. What is not being understood by governments and companies is that while a fully convertible RMB is a positive, long-term economic policy development, dramatic changes in tactics will be necessary in the short term if businesses wish to stay competitive. North American companies will be competing against Chinese counterparts in off-shore markets who are able to offer better financial terms to customers. If they can’t compete on price or terms, then North American companies will have to work harder on customer service and real-time inventory distribution to compensate.

John Gruetzner is managing director of Intercedent, an advisory firm with offices in Beijing, Hong Kong, Singapore and Toronto. The firm executes cross-border trade and investment projects focused on Asia. Its clients include Fortune 500 firms, SMEs and government agencies. Mr. Gruetzner has lived and worked in China for more than 28 years.

Source: BusinessWithoutBorders - GAI

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