New model of cross-border guarantee: RMB domestic and overseas linkage

“We are committed to attracting customers with offshore businesses, issuing letters of credit for them, obtaining loan guarantees for their offshore businesses, and also bringing new loan business to banks in Hong Kong and overseas units.” A Hong Kong investor The major bank described it this way in its financial report for the first half of 2014 not long ago.
In the past year, the process of RMB internationalization has been accelerating, which has also provided impetus for foreign banks in China to open up new businesses. RMB cross-border guarantee is an emerging example.
“This cross-border guarantee business itself is not new. The only new thing is that the internationalization of the RMB has brought about domestic and overseas linkages, and all of them use RMB.” Lu Xiqiang, general manager of Natixis China, recently accepted an exclusive interview with reporters in Shanghai Shi said that in other words, the internationalization of the RMB has brought about the emergence of new business models, which is not only good for enterprises, but also brings many opportunities for banks to provide financial services.
Cross-border RMB business growth adds new impetus
The RMB cross-border guarantee (or “cross-border financing guarantee”) referred to here means that enterprises have financing needs overseas. If the credit status of the associated domestic enterprises is good enough, they can deposit RMB cash in domestic banks. It makes a mortgage, uses its own credit guarantee to issue a RMB standby letter of credit to an overseas bank, and issues loans overseas to support the financing needs of its overseas enterprises.
“In the past, it was troublesome for domestic enterprises to provide guarantees. ‘Domestic guarantee and overseas loan’ mostly referred to foreign exchange and required approval from the State Administration of Foreign Exchange. But now the new situation is that RMB can be used for settlement, and RMB cross-border guarantee does not require prior approval, but every All orders need to be registered at the Cross-border Office of the People’s Bank of China. They need to know how many RMB standby letters of credit have been issued. There is no quota limit, but there are legal provisions. For example, the funds loaned out cannot be used for speculation but for financing.” Lu Ciqiang Xiang Xing said.
Due to the tightening of credit in the Mainland and the fact that low-interest loans in Hong Kong are lower than the cost of loans in the Mainland, it seems reasonable for banks to respond to market opportunities and increase such cross-border loan business. “Currently, it is a ‘win-win’ situation.” Lu Ciqiang said that the assets of domestic and overseas related enterprises that are willing to bear mutual risks can be revitalized, reduce financing costs, and promote the development of overseas business of enterprises; domestic banks will bear the corresponding credit At the same time, there is an additional business type while risking, and income such as handling fees is obtained. Overseas banks increase loan business and maintain customers; from the perspective of RMB internationalization, RMB needs to flow from both ends, which also improves the liquidity of RMB and provides Can be exchanged for preparation.
It is worth noting that this business is not limited to the same banking system, but it is more convenient to operate within the same banking system and has stronger customer stickiness, so foreign banks may have greater advantages in this regard.
In fact, the development of offshore financing business through this strategy has already brought substantial fee income to the above-mentioned Hong Kong banks in the first half of this year, and the bank’s loan balances in Hong Kong and Singapore have even achieved double-digit increases.
“For our foreign banks doing wholesale business in China, this is a new model and cannot be considered a profit growth point, but through this mechanism we can increase our support for customers.” Lu Ciqiang said of the company According to the report, the guarantee fee commission withdrawal ratio will also vary according to the customer’s credit level and the risk profile of the collateral.
In the past year, the internationalization of the RMB has brought an increasing number of such businesses, and the current demand is more concentrated in mainland China and Hong Kong. Other places like London are relatively small, but in theory it can be done. Lu Ciqiang said that if the RMB finally becomes freely convertible, this kind of business will “disappear”.
However, another insider of a major US-funded bank told this newspaper that they are not involved in much business in this area because not every bank can obtain relatively low financing costs overseas.
​Domestic and overseas linkage
With the continuous improvement of China’s economic influence and the gradual advancement of RMB internationalization, more and more companies are using RMB for cross-border trade settlement, and the use of RMB as a trade financing currency is also increasing. This provides foreign banks with Looking for a path to differentiated operations in China opens up “business opportunities.” Foreign banks including HSBC, Standard Chartered, Hang Seng, etc., without exception, expressed their emphasis on RMB cross-border business in this year’s semi-annual reports.
Taking the Shanghai Free Trade Zone as an example, in less than a year, many foreign banks have repeatedly tried new things and took the lead in launching innovative businesses such as cross-border RMB capital pooling and centralized cross-border RMB collection and payment for enterprises in the zone, and hope to deepen their development.
“For a European bank, in addition to being domestic, the global layout of RMB offshore centers will also bring us many opportunities overseas in the future.” Lu Ciqiang said that as long as the RMB is developing, RQFII, bond issuance, hedging products, etc. , all provide banks with business opportunities abroad.
It is worth noting that the road to internationalization of the RMB has not been smooth sailing. An obvious change in 2014 is that the RMB no longer shows the momentum of unilateral appreciation, and the two-way fluctuations of the RMB are likely to intensify in the future. Since late July, the exchange rate of RMB against the US dollar has continued to rise significantly. On August 20, the exchange rate of RMB against the US dollar continued to rise significantly.The spot exchange rate of � yuan closed at 6.1413, a new high since May.
The stability of the RMB currency and the expectation of long-term appreciation can create a better atmosphere for the internationalization of the RMB. Lu Ciqiang said that fluctuations in the RMB exchange rate are normal and a step toward convertibility. If the fluctuations continue, RQFII will have a certain impact. As long as it is believed that China’s economy will continue to develop, the market will be generally optimistic about the prospects of the RMB.