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Over the past decade we have seen a tremendous increase in trade between China and the rest of the world. During this time, the vast majority of trade transactions have been settled in U.S. dollars, since China’s official currency, the renminbi (RMB), has been used primarily to conduct domestic business within China. While this might have made negotiations easier on the surface for U.S. importers or exporters, it weakened the Chinese currency’s role in the global markets (while strengthening that of the U.S. dollar). This standard practice may be about to change with the Chinese government’s recent introduction of a new, secondary currency. The offshore Chinese renminbi (CNH) is now available to corporations and investors outside of China to settle China-related exposures.
China will be attempting to allow for the following three market events to occur in order and without disrupting the financial markets or its own domestic markets:
1. China would like its currency to be used to settle trade transactions.
2. China would like its currency to be used as an international investment currency.
3. China would like its currency to become an international reserve currency.
What does this mean to U.S. companies engaging in business with China? I recommend the following:
1. Continue to monitor developments involving the CNH to gauge its success as an acceptable, liquid international currency.
2. Engage in a dialogue with your Chinese counterparts to let them know you are willing to negotiate transactions in the local currency if that is beneficial to both parties.
3. Develop a relationship with a foreign exchange brokerage firm well versed in the nuances of payments to and from China.
GPS Capital Markets
Salt Lake City
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