Recently in Payment Systems Category

In 2010, China’s currency, the renminbi, picked up pace toward becoming a world currency. In June the Chinese government extended its renminbi trade settlement scheme to include 18 provinces and cities, as well as Guangdong province and Shanghai, which are now allowed to handle all international service transactions and imported goods’ purchases. Also, around 70,000 mainland-based entities were approved to settle deals in Chinese currency for their exported goods, up from just a few hundred before. If Hong Kong is any indication, these reforms seem set to greatly expand the renminbi’s international role.

Source: HKMA

Since this announcement, several events have further heightened the international profile of China’s currency:

July 2010: Hopewell Highway Infrastructure became the first non-financial company to issue bonds denominated in Chinese currency. It raised RMB 1.38 billion (USD 203 million) in its bond offering which took place in Hong Kong.

August 2010: Similarly, McDonald’s issued RMB 200 million (USD 29 million) in bonds—the first major multinational company to do so.

October 2010: The Asian Development Bank offers offers renminbi-denominated bonds with ten year maturities, raising RMB 1.2 billion (USD 180 million).

November 2010: Caterpillar issues RMB 1 billion (USD 150 million) worth of bonds.

November 2010: The Chinese government sells RMB 8 billion (USD 1.2 billion) of its sovereign debt to overseas investors, only its second such offering.

December 2010: Renminbi traded for the first time at Moscow’s MICEX after an inter-governmental agreement is reached in November.

January 2011: The Bank of China began allowing American firms to trade using renminbi.

January 2011: The World Bank’s International Finance Corporation (IFC) raised RMB 150 million (USD 23 million) at its first Chinese currency bond offering in Hong Kong.

Despite these developments, capital controls remain enough to confine China’s currency to a fairly limited role worldwide. The millions obtained through these bond issuances must still be approved by Chinese regulators before circulating in the mainland. Although Standard Chartered bank estimates that RMB 411 billion (USD 62 billion) was used to settle trade in 2010, this is mere pittance compared to China’s USD 2,973 billion in total trade for the year. Imports accounted for around 80% of this renminbi-settled trade, which leaves only 5% of China’s USD 1,578 billion worth of exports transacted with Chinese currency—this proportion most likely attributable to goods destined for Hong Kong for re-export.

It remains to be seen if the international momentum displayed by the renminbi will continue through 2011. Despite much progress, its widespread use internationally remains a more distant prospect.

One of the key aspects of any cross-border trade is the decision of which currency to use. Despite the increasing prominence of China’s economy – poised to become the world’s second-largest economy and recently becoming the world’s largest exporter – use of China’s currency, the Renminbi (RMB), has failed to achieve similar distinction in international trade. Here an attempt will be made to evaluate the overall trend of the RMB’s use in the global marketplace.

Government imposed currency controls have gradually been reduced in China in order to enhance the RMB’s appeal. As of 2008, revenues from commercial transactions are fully convertible. In fact, all current account transactions – including international payments – have been eliminated. For private accounts, the limit for converting RMB into foreign currency has been raised from USD 10,000-USD 20,000 to its current level of USD 50,000.

Besides the easing of restrictions, China’s government has also advanced several initiatives to increase usage of the RMB internationally. In April 2009, the China Foreign Exchange Trade System (CFETS) was launched in conjunction with Reuters. This system allows member banks to trade the RMB against the US dollar, the yen, the Hong Kong dollar, the euro, and the pound sterling. Then in July, five Chinese cities – Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan – were authorised to settle international transactions in Chinese currency. Through these conduits, the RMB is being promoted for use in trade with Hong Kong and ASEAN nations. Also in 2009, China’s government engaged in currency swaps with Argentina, South Korea, Indonesia, Hong Kong, Malaysia and Belarus. The central banks of these countries now possess RMB 650 million worth of foreign exchange reserves to facilitate trade using China’s currency.

The results from these policy changes are still pending, yet data from the Bank for International Settlements (BIS) shows that the RMB is traded far less frequently than many of the world’s other currencies. As of 2007 the RMB was ranked 19th, behind even Poland’s zloty, the Danish krone and the New Zealand dollar in terms of exchange frequency. Average daily turnover for the RMB has been increasing, however, whereas trade in major currencies such as the yen and US dollar have declined. As a result of policy changes, in Hong Kong deposits denominated in RMB have increased - from RMB 895 million in early 2004 to RMB 62.7 billion at the end of 2009.


Select Currencies % Share of Average Daily Turnover* - BIS
Currency 2001 2004 2007
US dollar 90.3 88.7 86.3
Euro 37.6 36.9 37.0
Yen 22.7 20.2 16.5
Pound sterling 13.2 16.9 15.0
Swiss franc 6.1 6.0 6.8
Australian dollar 4.2 5.9 6.7
Indian rupee 0.2 0.3 0.7
Renminbi 0.0 0.1 0.5
Brazilian real 0.4 0.2 0.4
Other 25.3 24.8 30.1
* Because there are two currencies in every transaction, the total of each column equals 200%.
Source: BIS



To view the trend in currency usage from another angle, with more recent figures from the IMF, one can observe the composition of foreign reserves held at central banks. Although still an overwhelming favorite of central banks, holdings of the US dollar have fallen from a high of 56% of total counted reserves to around 36% as of Q3 2009. Similarly, the yen has declined from 5% to just under 2%. The share of ‘other’ currencies – the catch-all category that would include the RMB – has increased, but only to 1.7% of all foreign exchange reserves.


IMF-COFER graph.JPG Note: Unallocated, according to the IMF, is the sum of the total reserves from non-reporting countries, and discrepancies between reporters’ data as reported to COFER and to International Financial Statistics.
Source: IMF COFER; THE BEIJING AXIS Analysis



With the US dollar and yen gradually giving way (perhaps given its recent troubles, the euro as well), the trend – although unwinding only incrementally – seems to be one toward a wider array of currencies in use internationally. This shift, along with China’s policies for further integration with the world’s financial markets, will continue to increase the role of the RMB in cross-border trade, although not as rapidly as other aspects of China’s economy.

Payment Terms

Beyond language and legal barriers, such as the requirement of GOST R certification, businessmen have to consider another important issue: payment terms. This is especially true given that Russia’s economy is still suffering from the financial crisis, recovering more slowly than other countries. Establishing acceptable payment terms can cause substantial delays to the progress of a deal.

There are three aspects of the payment process which tend to produce problems when setting the terms of trade between Chinese and Russian companies.

1. Russian buyers traditionally prefer to settle trades through cash.

2. The Russian banking system has yet to mature. By the end of 2008 there were approximately 1,300 banks in Russia. Over 800 of these were extremely small, with a capital base equivalent to less than USD 1 million. An extra element of disorder exists in Russia’s banking environment, in that many banks have a reputation for not honoring issued letters of credit. Furthermore, one-third of Russia’s banks may face bankruptcy as a result of the crisis; solvency is an important consideration when choosing a Russian bank’s services.

3. The level of cooperation between Chinese and Russian banks has yet to fully develop. Communication between both sides is inefficient. Chinese banks lack enough representative offices and agents in Russia, and vice versa.

Hence the situation suggests that extreme care must be taken when making payment arrangements for a Chinese supplier exporting to Russia. Some important steps to take include requiring the buyer to use a top, recognisable international bank when issuing the letter of credit, and asking for a risk-adjusted down payment when establishing the terms of trade. Additionally, the supplier may consider using the services of a company such as Sinosure which insures letters of credit against business and political risks. This type of service incurs extra charges but may be worth the cost for large traded values.

Just like any other prospective new market, Russia presents its own unique challenges. By overcoming the language barrier, by obtaining certifications to reduce the perception of poor quality and by taking extra precautions regarding the terms of payment, Chinese suppliers can prosper from increasing bilateral cooperation with Russia.

RMB.jpg

US president Barack Obama’s November visit to China highlighted China-US trade relations and the importance of these two major economies in leading the world out of crisis. The US president and other world leaders have charged that China is keeping its yuan currency artificially weak in order to benefit domestic exporters. An appreciating yuan, these foreign leaders feel, would bring greater balance to trade and lead the world out of the current crisis. But is this really the case? Perhaps history and a few economists can shed more light on this issue.

Those in favor of a dearer yuan include the IMF Managing Director, Dominique Strauss-Kahn. In a recent speech he emphasised the need for the global economy to shift away from the old paradigm based upon US consumption, fueled by easy credit and cheap goods from export-dominant countries. Trade surplus countries such as China must fill the consumption void left in the absence of the US. A stronger yuan is needed to increase Chinese buyers’ purchasing power abroad and to stimulate a depressed world economy.

Nobel Prize winning economist Paul Krugman is even more strident in his criticism of China’s monetary policy. He contends that China has engaged in a 'beggar-thy-neighbor devaluation' and that the nation is “siphoning much needed demand away from the rest of the world into the pockets of artificially competitive Chinese consumers” in a time of crisis. He warns that large trade imbalances, such as that between China and the US, could lead to an eventual failure in trade altogether. An appreciated yuan, he insists, is necessary to heal the world’s economic ills.

Not all agree with this sentiment. Justin Yifu Lin, chief economist at the World Bank, warns that appreciating the yuan will not help to improve global trade balances and would spoil what appears to be the beginning of economic recovery. Goods would become more expensive in the US, adversely affecting the already beleaguered American consumer. The trade deficit between the two countries would not diminish significantly because manufactured goods shipped from China are not produced domestically in the US. Mr. Lin advises instead that a growing China and a reformed US financial sector are the keys to global recovery.

Historic precedence also challenges the assertions of the likes of Krugman and Strauss-Kahn. In the 1980s the world’s major central banks worked to appreciate the Japanese yen by around 50% to the USD. The unexpected result was that the US trade deficit with Japan actually increased. The first significant decrease did not occur until 1990, five years after the central banks’ action and three years after the currency revaluation.

There is no simple short-term solution to trade imbalances. In the end, China’s monetary policy is set by China’s leaders who appear content with the yuan at around 6.82 to the USD. The result: China’s GDP once again surpassed the 8% growth rate with indications that the rest of the world is regaining its economic footing. It could be a lot worse. Debates on China's monetary policy will continue, but for now the yuan is staying put, for better or worse.

In early July, Sinosure, China’s only officially-supported insurance company specializing in credit and investment insurance, issued operational data for H1 2009. From Jan to Jun 2009, the total short-term insured export credit was USD24.21 billion, with a growth of 31.5%.

At the end of May, the Chinese government formulated a series of measures to improve export credit insurance regulation. The measures included enhancing export credit insurance application coverage, arranging USD84 billion for export credit insurance, reducing premium written rates, etc.

Improving export credit insurance will help improve exporters’ competitiveness and company strength by supporting them to provide better payment terms, while the other export stimulation measures, such as raising export tax rebates or reducing costs for exporting, particularly emphasize reducing cost. Improving export credit insurance is recognized as a better measure to improve export advantage in the long-term.

One example is when the international photovoltaic industry turned from suppliers’ market to buyers’ market, the buyers required more favorable payment terms, such as payment settled in 90-180 days. Sinosure made adjustments accordingly, and from Jan to Jun 2009, Sinosure insured USD800 million for China’s photovoltaic industry, almost four times the number of 2008.

Because of the global financial crisis, some foreign companies affected by the devaluation of local currency provided better export prices than Chinese suppliers. Faced with strong competition from foreign enterprises, some Chinese companies are working with Sinosure to provide better payment terms and get orders without reducing prices. Export credit insurance also helps Chinese exporters solve financing problems.

(Source: China Insurance News)
The payment procedure is an integral part of sourcing, ranking alongside desk research, initial contact, negotiation, and due diligence checks. Generally, there are three types of payment terms: Telegraphic Transfer (T/T), Collection, and Letter of Credit (L/C). T/T, as the most popular payment method, is welcomed by all suppliers, especially in China in recent years.

Yet the T/T payment method is not always fully acceptable to buyers, as it involves the direct transfer of funds, and may cause some problems during negotiations between buyers and sellers. In essence, there are three reasons why suppliers would generally prefer T/T:

Reason 1: Minimizing Risk
Minimizing risk is naturally important for suppliers. They would always prefer to have 100% of the amount in hand or at least part of the money in hand in case the buyer cancels the order after they finish the production.

Reason 2: Maintaining Capital Flow
Maintaining the flow of capital in a firm is always important, yet even more so in the current climate. Getting all the money or a large part of the money in advance can significantly enhance the supplier’s investment in new raw materials, for example.

Reason 3: Dealing with RMB appreciation
The exchange rate between the RMB and tne US Dollar has been continuously climbing for about 3 years since China started exchange rate reform in 2005. In 2007, the RMB appreciated by about 13% to the USD, and in 2008 by about 7%. This added a great deal of pressure for suppliers to obtain the payment within 20 or 30 days as they are afraid of the rapid change of the RMB and want to get the money as soon as possible.


Aside from these three reasons, there are also other concerns leading Chinese suppliers to only prefer T/T payment. Some plants consider the T/T way as fast and convenient, while some plants just do not have enough experience to handle ‘Collection’ or ‘L/C’. Some plants require T/T down payment for the purposes of preventing fraud. There are also other reasons which I do not mention here, but I believe that more communication and mutual understanding will definitely help both parties, the buyer and the supplier, to close the deal.

Hence it would seem obvious to suggest that a mixed payment method will be beneficial to both parties. For example, to use 10-20% of T/T down payment and 80-90% of L/C is a popular way to settle the payment term in the contract. Yet of course the buyer would base their contract negotiations on comprehensive due diligence checks and thorough investigation of the supplier.

Winter Chill: E-Commerce and B2B

| | Comments (0) | TrackBacks (0)
e-ecommerce-in-china1.jpgChina's economy has sustained dire effects from the global economic slowdown, and the spill-over has impacted e-commerce as a trading platform. In July 2008, Alibaba CEO Jack Ma spoke of the coming "winter chill" and told his staff that "We are prepared for the winter, so we have reserved a lot of cash."

Yet in these demanding times there are also new opportunities. According to research conducted by SPG Media for their 2007-2008 report on global e-procurement, the Internet is still a popular platform for global sourcing. After gathering opinions from procurement specialists and c-level personnel from Forbes 2000 organisations, they found that
  • 81% of users use Google to search for business information
  • 68% use the Internet as their first resource when sourcing new suppliers
  • 80% say time-saving is the key benefit when sourcing suppliers online, and
  • 86% of senior-level personnel believe the online procurement activities of their organisations will increase significantly over the next five years.

On 29 December 2008, Alibaba collaborated with the Jiangsu provincial government to establish a branch website called the 'Jiangsu International E-commerce Platform.' On the website's first day of operation, more than 4000 companies registered as new members. Jiangsu, like Zhejiang and Guangdong, is an economic powerhouse in China and ranks as the third-richest province in terms of per capita GDP. SMEs in Jiangsu suffered from the financial crisis, however, as a large part of their exports previously went to the US market. Now, as they struggle to survive and seek new markets such as Australia and the Middle East, they can profit a lot from e-commerce.

Compared with traditional trading methods, online business has many advantages. It has lower distribution and inventory costs, faster reaction times for enquiries, and it integrates information with all parts of the supply chain. It can serve as a one-stop solution for buyers, dealers, wholesalers and suppliers and can cut out many of the hassles, especially during this time when suppliers are trying to expose their products to new parts of the world and buyers around the world are really trying to save money.  

During 2008, e-commerce turnover in China was more than RMB1.5 trillion. And according to national policy guidelines, by the end of 2010, 25% of the procurement of large-size companies should be completed online. So while there may be a chill in the air at the moment, spring is sure to come soon for e-commerce and B2B.

(Image from wellness-network.org)

How to Make a Good Enquiry Part 3

| | Comments (0) | TrackBacks (0)
  • Quotations
Quotations should always include the trade terms, currency, price number and unit. Both sellers and buyers should understand the trade terminology very well, especially those terms which are commonly used, such as FOB, CIF, C&F, etc. The choice of currency has become extremely important since exchange rates between RMB and other currencies are frequently fluctuating. So it is essential for the buyers to be familiar with the RMB's exchange rate with their local currency and to be prepared for the potential risk caused by the RMB's fluctuation. For some special products, the buyer should clarify what unit the quotation should be based on. For example, with casting products, buyers should make it clear whether the price should be per piece or per kg.

  • Payment Terms
Buyers usually consider the enquiry stage to be too early to discuss payment. This is indeed true most of the time, but buyers operating within financial systems with specific requirements should be given favorable terms. For example, some countries have strict foreign currency systems that require buyers to transfer a certain minimum amount before the goods can be shipped, and sometimes buyers are subject to a long process of applying for bank clearance or approval from a currency management bureau. Under such circumstances, the buyer may prefer lower prepayment or other payment terms which require no T/T before shipment, which creates extra banking costs for both sellers and buyers. Those working in procurement should be aware of these limitations and if necessary, let the potential suppliers know.

  • Delivery Time
When enquiring about delivery time, the buyer should pay attention to the following:
  1. If a sample is required, how long will it take for the sample to be ready?
  2. How long will it take to manufacture different quantities of products?
  3. When will delivery time commence, the contract signing date or the prepayment arrival date?
  4. Will delivery time include the shipment booking time? (After they are ready, goods can sometimes only be shipped several weeks later due to difficulties in booking the shipment, especially bulk shipments, or shipments to certain countries).
In my next posting, I will cover more items.


What can you get from Alibaba?

| | Comments (2) | TrackBacks (0)
alibaba.jpgAlibaba is the world's leading e-commerce service provider and the most active online market and trading community in the world. It is a good platform to pull buyers and sellers together, and because it has a huge database of Chinese suppliers and made-in-China products, it has almost become an indispensable tool for international buyers to find suppliers in China. In my experience, people may have any of the following three outcomes when they search for suppliers on Alibaba:

  • Buyers can find many suppliers and most of them are good. This will be the case for some commodities which Chinese suppliers have developed mature experience of manufacturing and international trade, like toys, bicycles, T-shirts, etc. Buyers can make good judgments about the quality of the supplier from the suppliers' English introduction and by chatting with them online. 

  • Buyers can find some suppliers but cannot judge if they are good. This will be the case in some industries where China is developing trade experience, like chemicals, machinery, etc. The suppliers in these industries usually have poor English skills, a bad homepage, simple company and product introductions and nobody online for chatting. In addition, since many small and middle-sized plants do not have their own export department, you cannot be sure if you are merely talking to a trading company using the plant's name.

  • Buyers cannot find any qualified suppliers. Many big suppliers have no registration on Alibaba or a very simple one, with only a company name and a telephone number not updated for years. Also, some suppliers only register on the Chinese version of Alibaba.

In all Alibaba is a good channel for international buyers to start from or to refer to. But people are usually not sure what they will get from it and how the result will be. There will always be a need for more desk research and on-the-ground inspection in order to choose the correct supplier.
Business-to-business (B2B) is still a relatively novel concept in sourcing from China, as most payments are still made via more conventional methods, i.e. bank transfers and Letters of Credit. As Bill Dodson writes at This is China! Blog,
For most companies in China, the websites are little more than brochures for brick-and-mortar operations that provide a service or product that is paid for in ways other than the internet. B2B in the form of e-commerce has been more difficult to monetize - especially in China - because the products on offer have to go through a manufacturing process that may or may not involve design, testing and quality checks.
In addition, international transactions are further complicated by currency conversion issues:
A company cannot simply wire money to a Chinese bank if the supplier does not have a foreign currency account at the bank. The supplier also requires permission to convert the payment into RMB that the bank will hold in the company's RMB account. Such complexity and sophistication are beyond the reach of most suppliers, which are miles away from banks that likely do not support such services in the countryside anyway.
Alibaba's Alipay, originally created to support online auctions at Alibaba Group asset Taobao, however, is China's first attempt at an online payment system, and portals like Alibaba and Made-in-China are increasingly inserting themselves in online transactions between buyers and sellers. Alibaba this week also announced plans for a partnership with Intel to launch a special B2B computer to meet the e-commerce demand of small and medium enterprises in China. The computer will be embedded into Alibaba's e-commerce platform for SMEs, and is expected to be released within the year.

Yet as China's B2B industry grows rapidly and as China expands domestically and internationally, certainly there is room for more than one Alibaba? So concludes Seeking Alpha, while profiling e-Future, a player that is growing at an exponential pace in the B2B industry. In less than one month, e-Future has launched two new websites to go along with its www.99114.com.cn, and as Seeking Alpha reported in March, for the duration of last year e-Future grew by 79%, making it a veritable cash cow due to the fees the company obtains for software contracts provided to customers.

See also Source Juice: Importing over the Internet? Challenges, opportunities, and hedging your bets!
It is now well known that the famous - and hitherto unanimously considered cheap - China price is inexorably inching upwards. In fact, everything in China is going up, from yesterday's estimated earthquake death toll to manufacturing costs to wedding costs and of course, inflation. As China gradually moves up the value chain, however, despite the odd snow storm and earthquake, the inevitably rising China price is detrimental to China's status as the best country for low cost sourcing, compared to emerging opportunities offered by countries such as Vietnam, Turkey, India and others in Central and Eastern Europe.

In a survey for the American Chamber of Commerce's annual white paper, more than two-thirds of member companies agreed last month that China was losing its competitive advantage in global markets due to rising costs, Industry Week reported. The top five business challenges in China were listed as human resources constraints, inconsistent regulatory interpretation, unclear regulation, lack of transparency and bureaucracy. Industry Week earlier this month reported on a recent study of foreign manufacturers in China conducted jointly by the American Chamber of Commerce Shanghai and management consulting firm Booz Allen Hamilton, which found that 54% of companies manufacturing products in China agreed that China is losing its competitive edge to other low-cost nations like India and Vietnam, yet 83% intended to maintain their current operations in China despite the rising costs of manufacturing.

While China is supposedly struggling to hold on to its prime position for cheap low cost country sourcing, new importers often do not realize the full impact of hidden costs of customs and shipping until the first order from China is complete. At Smart China Sourcing, Dylan Blankenship outlined what items need to be included to calculate total landed costs, and how to minimize these. A quote from a factory in China is only the beginning of the calculation, and it is important to clarify the exact terms of sale and what charges are the responsibility of each party, factory and buyer. Smaller importers can often pay less by negotiating to ship containers under a bigger importer's existing contract, helping them to meet their shipping quota. Additional costs may accrue, however, from relevant duty costs, courier/postage of original documentation, customs broker coordination fees, and 'last mile' providers that deliver to the final destination.   

The last few months have seen clear indications of the changed state of China's payment and settlement systems. Research reported in August of this year by Towergroup found that, following a series of modernizations, China now possesses national payment capabilities worthy of an 'economic powerhouse.' In just ten years China's Central Bank has managed to implement three new payment systems using state-of-the-art technology, providing a national network for high-value payments, bulk low-value payments, and national check-image exchange. As China has historically been prone to inefficient and fragmented payment systems, implementing advanced payment products and infrastructure to cope with China's commercial expansion is a significant step. China has also been able to leverage Hong Kong's advanced infrastructure and banking reputation under the "one country two systems" policy while the separate payment systems of China and Hong Kong have become more integrated.

In the wake of payment system modernization, China's Internet payment systems environment is likewise developing rapidly. However according to Chen Lei of China Payments News (in an article last month on gtnews, needs registration) Internet payment systems in China are fundamentally developed and pursued by banks individually, as a nationwide integrated bank card system (China Unionpay) was only set up in 2002. And though growing in popularity, credit cards as yet make up only a fraction of all bank cards in use in China (0.3% of 500 million bank cards at the end of 2002).

Yet it seems that business for online retailers in China is definitely starting to pick up. According to the Internet Society of China (as presented in an article appearing in Business Week last month), consumer e-commerce in China is set to top $1 billion in 2007 and grow at an average of 34% annually over the next three years. The article also presented figures from market watcher iResearch, which projected that online payments by both companies and consumers in China are expected to triple over the next two years to $24 billion. No doubt the spectacular rise of Alibaba.com will provide further impetus to this process.