New opportunities

Just recently, the Bangko Sentral ng Pilipinas (BSP) gave the green light for local banks, led by the subsidiary of Bank of China, to develop a formal peso-renminbi spot market.

What does this mean for us? Basically, it will make foreign exchange transactions between China and the Philippines more efficient and cheaper. Chinese tourists will be able to change their renminbi (yuan) into Philippine pesos at better exchange rates while local businessmen will be able to convert their pesos into yuan without having to rely on the US dollar as an intermediate peg.

According to BSP Governor Nestor Espenilla Jr., the move was being made in response to the growing economic relations between China and the Philippines. More and more bank clients need yuan, whether for tourism purposes or for buying raw materials and other products from Chinese suppliers.

This is not something that can be ignored. While we would of course prefer everything to be made using home-grown or local materials and to be made in the Philippines, the fact is if you want something done and at a low price, or if you are simply looking for a cheap raw material, go to China. China can make everything cheaper. Whether the quality is there is of course another question.

China still makes 19 percent of Nike shoes as of last year, but we are seeing Vietnam getting a bigger share. Vietnam now makes 44 percent of Adidas shoes. Balenciaga has started manufacturing in China. Other huge fashion labels like Burberry, Armani and Prada are also now being made in China.

And if we do not improve the business climate in the Philippines, expect more Philippine products to be made in China, or their raw materials, sourced from China.

China’s total merchandise trade with the Philippines continues to rise, as the former remains to be the country’s top bilateral trading partner for the second year.

In 2016, China surpassed Japan as the country’s top trading partner with total trade amounting to $21.9 billion, accounting for 15.5 percent of the Philippines’ total trade for that year, an increase from 13.6 percent in 2015.

The creation of a formal peso-renminbi spot market is expected to improve this even more.

Currently, Philippine and Chinese currencies are priced first on US dollar rates for cross-border transactions. But when the USD is used as a bridge currency, traders pay additional hedging costs to protect against currency risks, on top of paying the operational costs of currency conversion.

By invoicing or remitting funds directly in RMB, FX risk and conversion fees are minimized, lowering the total transaction cost of investments, and encouraging greater business between parties in the Philippines and China.

Filipino importers at present are in general not very open to settling in RMB because of the challenge of sourcing the currency. This is something that Bank of China’s RMB trading platform and the larger Philippine RMB community are looking to solve.

According to experts, RMB settling minimizes foreign exchange risks and conversion fees resulting in savings from one to two percent for the parties. Savings are subject to the exchange rates.

Both importers and their suppliers in China benefit from RMB settling because they are able to avoid FX risks and fees associated with having to exchange currencies twice (PHP -> USD -> RMB and vice versa). And because the benefits are shared, better cooperation between the two countries can be had.

They explained that exporters can enjoy similar benefits as importers in that they minimize FX risks and conversion fees when they are able to accept payment in RMB and change this directly to peso. Savings will vary depending on the exchange rate, but this can be estimated at between one-two percent of the total transaction cost, compared to when USD is used as the bridge currency.

If a business has trade flows in RMB, it makes sense to keep RMB investments in their portfolio. 

And then of course, Bank of China can help assure a ready supply of RMB for cross-border transaction because it has a natural flow of renminbi that is not sourced from other banks, giving it a ready pool of funds for use by local businesses in settling international deals. 

In partnership with Bank of China, foreign exchange service on RMB is now readily available in the Philippines through local banks.

 These include several bank members of the Philippine RMB Community: AUB, BDO, BPI, China Bank, EastWest Bank, Metrobank, PBCom, PNB, Phil. Business Bank, RCBC, Sterling Bank, Security Bank, Union Bank, Bank of Commerce and Bank of China.

The BSP and Bank of China, along with its local banking partners, are in the process of organizing a Philippine RMB Community that will enable efficient, cost-effective RMB settling, making settlements easy for local businesses that want to break in the Chinese market and build key financial and relationship advantages with Chinese firms. An MOU among members of this RMB Community is expected to be signed soon.For comments, e-mail at [email protected]