CNH Tracker-Pilot quota system for moving yuan offshore gathers traction

Thu May 23, 2013 12:56am EDT

By Saikat Chatterjee
    HONG KONG, May 23 (Reuters) - A pilot quota system that
allows companies operating in China to freely transfer some of
their yuan profits offshore has gathered some traction in recent
months and bankers expect more firms to seek approvals to
participate.
    So far only a handful of multinationals - including General
Electric, Ford Motor Co, Danone,
Schneider Electric and Moog Inc - have been
granted quotas, operated through authorised transaction banks.
    The relaxation of rules, seen as one of China's incremental
steps towards capital account convertibility for the yuan, gives
firms more flexibility to hedge foreign exchange risk, put money
to work by investing in short-dated instruments, or pay-off
short term debt. 
   "We expect more approvals to be given in the coming months,"
said Michael Vrontamitis, head of product management for Asia,
transaction banking at Standard Chartered Bank, one of a handful
of transaction banks authorised to offer the quotas. 
    But like with all pilot schemes from China, this one too has
a long way to go before the mechanism gets smoother, as
negotiating the thicket of rules needed to transfer yuan funds
across the border varies from province to province and can take
anywhere between 4-6 months.
    S. Subramanian, financial director Asia-Pacific at Moog, a
maker of precision motion control products, said that earlier
the main route for bringing yuan earnings out of China had been
by remitting them to shareholders via dividends.
    "But now we can take the yuan out of China and inject back
into our operations on the mainland when we need to without
having to take more approvals," he told Reuters. "It improves
our ability to do business greatly inside China."
     The pilot scheme was implemented first for companies in
Shanghai last September, but it has since been extended to
companies operating from other cities like Shenzhen and
Guangzhou.
    China has given priority to making the switch to capital
account convertibility for the yuan. Premier Li Keqiang told a
meeting of the State Council, China's cabinet, that the
government would produce a detailed "operational plan" later
this year, though he did not offer a timeline for
convertibility. 
    Apart from some small restrictions, China's yuan is largely
convertible on the current account.
    In recent weeks, China's foreign exchange regulator has
simplified rules for governing foreign direct investment,
clamped down on speculative capital flows masked as trade
remittances and doled out fresh quotas under its twin investment
schemes to buy onshore stocks and bonds.

    WEEK IN REVIEW:
    * China's foreign exchange regulator will simplify
regulation of foreign currency transactions for companies
operating in China's special economic zones. Companies working
within Chinese special economic zones would be able to take
legal profits derived from exports out of the country, said the
State Administration of Foreign Exchange (SAFE) in a statement
on its website.
    * In a growing crackdown on the bond market, China's central
bank will require underwriters to price new bond issues close to
those traded in the secondary market. The mainly technical
arrangements also include a ban on a common practice in which
underwriters sell bonds to some sub-underwriters on the first
day of trading at preferential prices.
    * In keeping with a trend in recent weeks, the People's Bank
of China continued to fix the yuan's midpoint higher in recent
weeks to another record high of 6.1904 on Wednesday. Thursday's
fixing was slightly weaker at 6.1947, reflecting the dollar's
gains in global markets.
    * Hopes of trading in yuan-denominated commodity contracts
have dimmed greatly after the Hong Kong Mercantile Exchange,
operator of an electronic platform for trading in gold and
silver futures gave up its license to provide trading services. 
Albert Helmig, its president said in March that the bourse would
offer yuan-settled gold and copper futures by July and other
industrial metals over the next 12 months.     
    
    CHART OF THE WEEK:  
    Attractive dim sum:Offshore bonds denominated in the Chinese currency have
generally outperformed their other local currency counterparts
so far this year thanks to a stronger renminbi. That has helped
demand for new issuers. 
              
RECENT STORIES:
CNH Tracker-Stronger currency enhances appetite for dim sumChina eases forex rules in special economic zones               
                       

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