The upside of yuan invoicing for Chinese imports

SA importers traditionally tend to think in terms of paying their Chinese suppliers in dollars rather than in yuan. However, this is changing quickly, and with good reason.

Those importing from China can derive significant benefits from being invoiced in yuan. It has benefits for suppliers too, making this potentially a win-win outcome for both sides.

SA importers can gain in three ways. First, by potentially paying a lower price. Yuan invoicing presents many benefits to Chinese suppliers, so it is they who will often offer a discount on the dollar price.

Most importantly, to manage currency risk, Chinese exporters have historically tended to build into their pricing a buffer of at least 2%-3%, and sometimes as much as 5%. While Chinese exporters may be reluctant to let go of that premium, it is certainly worthwhile for an SA importer to initiate the conversation.

Simply put, in exchange for removing suppliers’ currency risk — as well as bringing them other benefits — a discount can be negotiated. In our experience this argument often works well, with suppliers providing discounts of 2% or even more. There is certainly no harm in trying.

Another gain is paying lower forward points. Since interest rates are higher in China than in the US (for now anyway), the cost of forward cover is lower for yuan-rand transactions than dollar-rand transactions.

As such, even if the Chinese supplier simply converts the dollar price to a yuan price at the prevailing spot exchange rate — that is, without providing a discount — the final price in rands will be lower when hedged. This is a huge possible benefit, particularly for long-dated deals. We have seen one case where the end rand price was 6% lower when invoiced in yuan rather than dollars.

Lowering currency risk is another advantage. The rand is one of the world’s most volatile currencies, but the yuan-rand exchange rate is less volatile than the dollar-rand rate. Lower volatility means lower risk.

This lowered risk is evident in most market conditions but is particularly important in periods of huge market stress, such as in the great financial crisis or during the early days of the Covid-19 pandemic. Both the yuan and rand tend to depreciate in these periods, but the movements in the yuan-rand exchange rate are notably smaller than in the dollar-rand rate. Yes, the rand still weakens, but less so on the yuan cross, limiting the worst of the currency losses.

Chinese suppliers should also have good reason to favour yuan invoicing. Most importantly, their currency risk is removed. Under dollar invoicing the Chinese supplier carries the dollar/yuan exchange rate risk. This isn’t huge — the yuan is far less volatile than the rand — but it is still meaningful.

Yuan invoicing can also bring faster rebates. Chinese exporters qualify for tax rebates ranging from 6% to 16%, depending on the type of goods exported. Anecdotal evidence suggests exporters tend to receive those rebates from the tax authorities a lot quicker if they invoice in yuan rather than dollars, with smaller entities often waiting up to three months in the latter case.

Yuan invoicing also fits in nicely with China’s national objectives. In recent years the yuan has become the focus of efforts by China’s government to make it one of the world’s foremost reserve currencies, alongside the dollar. That has led to an environment in which the government is strongly supportive of exporters using the yuan to settle export transactions.

There are few, if any, downsides to yuan invoicing. The yuan is now the world’s fifth most traded currency, implying liquidity is high. Online dealing system and trading platforms make it just as easy for importers to hedge in the Chinese yuan as in dollars or other major currencies.

Given the win-win, it’s not surprising that interest in yuan invoicing is growing. Our experience is that yuan payments now account for about 20% of SA outward payments to China, and this is growing rapidly.

For those SA importers who have not done so already, it’s worth initiating a discussion with Chinese suppliers. A first step would be to ask them to issue invoices in both dollars and yuan, as a basis to review the differential and open negotiations that could lead to more attractive pricing. What’s important is to start the process.

There will still be some circumstances in which Chinese exporters will prefer to invoice in dollars, perhaps because their imports are priced in dollars as well, making it easier for their finances. What’s important is for SA importers to start a transparent conversation. The potential upside is worth it.

Cairns is client strategist and Visser is head of channels: foreign exchange at Rand Merchant Bank.