RMB Reforms The Yuan Leaps Forward

China loosens controls on its currency, and big German companies are making the most of it.
It takes German brakes to stop a Chinese bullet train.

Stopping a high-speed train is a delicate maneuver that requires the most modern brake technology. With the growth of China's high-speed rail network, the demand for such high-tech safety elements is exploding, which is good news for German supplier Knorr-Bremse.

The Munich-based brake system manufacturer is setting records for orders and earnings in the world’s largest rail market. And because of recent steps by China to ease the flow of its currency, Knorr-Bremse can take more of its lush profits back to Germany, with less hassle and expense.

The Chinese financial system has long been sealed off by restrictions on how its currency, the yuan, moved from one market to another. Now the government is moving to liberalize currency policies, including the release of cross-border credits and establishment of a yuan-trading center in Frankfurt.

“Knorr-Bremse was one of the first companies that made use of the liberalization in currency management by the Chinese government, and we will also continue to make use of it,” said Sigurd Dahrendorf, the company’s deputy treasury chief.

Now China has upped the stakes. Since the beginning of 2015, a regular cash pooling in yuan across Chinese borders is becoming a reality.

“The goal is to promote growth in trade,” said Gabriele Schnell, head of cash management at HSBC Trinkaus, the German financial services company.

It is now possible to place yuan funds from a Chinese business into an account in Germany. Oliver Brinkmann, Deutsche Bank, Hong Kong

Just a few years ago, a “great wall” of bank transfer controls separated yuan territory from foreign countries. Whoever wanted to take their Chinese profits out of the country could practically only do that through complicated payouts.

Then taxes on profits were due on top of that, in addition to heaps of paperwork. Chinese authorities needed a long time to clear the applications – and “trapped cash” was a big problem in doing business in China. Although German businesses earned a lot in the rapidly growing market, they couldn’t easily make the revenues available to parent companies in Germany.

The new moves to ease currency policy greatly simplify that.

“Basically, it is now possible to place a daily concentration of liquid yuan funds from a Chinese business into an account in Germany,” said Oliver Brinkmann, who is in charge of corporate clients and capital markets for Deutsche Bank in Hong Kong. “It is a far-reaching change.”

But there are still a whole string of limits. The money has to come from the real economy, for instance, meaning that products must have been sold. Profits from financial or real estate markets are excluded.


German-Chinese Trade-01

Also, companies must have been in business for at least three years and verify sales in China of over €650 million, or about $742  million.

“This limit excludes many small and medium-sized businesses,” said Mr. Brinkmann. It is however only a first step of reform, and he said China would likely expand currency liberalization so it is also available to smaller companies.

A further loosening of restrictions is probably necessary to completely leverage the new reform. Knorr-Bremse, for example, cannot yet use cross-border cash pooling because complications with Chinese partner firms would arise.  The company prefers to use internal group credits, which are less complicated.

But the reforms show that the government clearly wants to simplify matters for companies doing business in China, and to bring order between the yuan and euro. Only then can the yuan become a leading trade and reserve currency in the long term.

The policies are already having an effect. In December, the yuan rose to become the world’s fifth most-used payment currency, between the Japanese yen and Canadian dollar. That brings it very close to the top currencies – the dollar, euro and pound.


Finn Mayer-Kuckuk is based in Beijing and covers East Asia for Handelsblatt. To contact him: [email protected].