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"Anybody out there?"

Just checking if someone is reading the blog? Have not had very many reactions in the form of comments, so maybe the topics are a bit off, or in forum lingo OTF (off the topic), or just boring . Give me some feedback, give me some hints of what you would like to hear from this part of the world and I will obey.

Or, just tell me in a comment the name of the group that sang so well "Anybody out there?".

Hakan

Now and then I receive questions from companies outside of China wondering if they can open an account inside of China. Most often it is an importer that has been requested by their supplier to pay the goods in RMB instead of USD (the most commonly used trading currency in China.

The reason behind this request is of course the weakening of the USD against the RMB. For many, many years the RMB was pegged to the USD at 8.27, but during the summer of 2005 the Chinese government announced that the RMB should be valued against a basket of currencies. At the same time the RMB was also allowed to move on a daily basis within a regulated span. As a result the RMB rate today is 6.81 towards the USD. Quite a significant move.

For the Chinese exporters this new order has meant that they now have a currency exposure to take care of. The simplest way of getting rid of the exposure is of course to ask to get paid in RMB. The problem is though that RMB is a non convertible currency, making it impossible for an importer to ask their bank to make a payment in RMB to China.

But what if the importer could open an account inside China, transfer foreign currency to that account and exchange this money in to RMB. The supplier could then be paid from this account. A simple, logic and efficient solution that is working in most other countries, but unfortunately this is not the case in China. Only companies domiciled in China are allowed to open accounts with a bank in China. This goes for both foreign currency accounts as well as for RMB accounts.

But if the importer really is prepared to take on the currency risk from the supplier there is a solution. The invoice can be nominated in RMB, but it will state that on maturity, the importer will pay an equivalent amount in USD, calculated using the official USD/RMB rate as published by People’s Bank of China on the same date.

Hakan

Even though China in some areas is getting more and more liberal, the financial area is still heavely regulated. When I say the financial area I mean everything from account opening to the currency rate. One reason is of course that by issuing different regulations affecting the financial area you can also to some degree steer the economy in to the "right" direction. During this year we have seen a number of new regaulations aiming to cool down the economy. The very high growth rate last year and beginning of this year have had a very negative effect on the consumer price index, which in turn have an impact on the man on the street.

So this year the authorities imposed a cap on how much a bank can increase the loan portfolio in local currency. Less money to borrow equals less growth which gives less inflation. However, as in so many other cases the market finds new paths, ways, loop holes etc to solve a problem and so has also been the case in China during the year. Money has found its way in to China and it has been in such quantities that the authorities have issued a number of regulations against this type of money, so called "hot money".

And today we have premiere for two of these new anti hot money-rules.

The first rule states that an importing company in China is only allowed to have deferred payments above 90 days equivalent of 10% of last years import. All other payments out of China have to be made within 90 days after the day the goods was declared at the customs.

This have quite an effect on many newly started companies who are importing material to be used in their production. The reason it has an effect is that in many cases the parent is supporting their sibling by giving VERY long payments terms for the material imported. Which of course is a way of supporting the start up with some working capital. But, it should also mean that Chinese importers can only to a limited extent ask for longer payments periods than 90 days.

The second rule valid also from today is relating to pre-payments. From today a company who wants to receive a pre-payment needs to apply for a pre-payment quota from State Admininstration of Foreign Exchange (SAFE). No quota, no pre-payment.

And we banks have been appointed by the authorities to see to that these anti hot money-rules are follwed.

Hakan

It is Sunday afternoon and the office is in full swing settling everything that needs to be settled before the upcoming Golden Week where we will celebrate the Chinese National Day on October 1 by having a week off.

We used to have three Golden Weeks in a year, but now only two. The first one of the year is around the Chinese New Year, meaning that it is sometime in January or February, depending on the Lunar Year calendar. The second one used to be around May 1, but from this year it has been cancelled and instead we have received a day here and a day there. These new days have in my opinion great names: Tomb Sweeping Day, Dragon Boat Festival day and Mid-Autumn Festival. One of the reasons for canceling the May Golden Week was that having more then 1 billion people on holiday for a week is quite a logistic problem. Another reason was that popular tourist sights simply get worn down by the sheer number of people visiting them during this week. The third Golden Week is around October 1 and the purpose is of course to honor the birth of the People’s Republic of China.

We are all, of course, looking forward to these Golden Weeks, however, there is no such thing as a free lunch and that is the reason why the office is in full swing on a Sunday. You see, to compensate for the Golden Week you have to work Saturday and Sunday the weekend before or after. But, I have to admit that even though a seven day working week feels quite long, it is worth it for a full week holiday.

China is back in office on October 6.

Hakan