Historically, China's controlled foreign exchange market made payments in yuan (CNY), also known as the renminbi, difficult for foreign businesses. Generally, supplier payments were made in US dollars or sometimes in euros or pounds.

However, efforts by the Chinese authorities to open and liberalise the domestic economy in recent years are starting to come to fruition. There are some restrictions on transferring yuan out of China, but it's never been easier, faster, or cheaper to make payments into the country, which is a giant step forward.

Paying invoices in yuan is often cheaper as quotes raised in other currencies tend to have a buffer built in to protect the supplier. This is because they have to wait ten days once the payment is received to exchange the amount for local currency, which opens them up to the risk of fluctuation.

If you are paying in another currency

Fluctuation in the yuan's exchange rate against the dollar used to be limited. However, the People's Bank of China (PBOC) has recently made strides in its pledge to liberalise the yuan further.

Although the yuan is behaving more and more like a free-floating currency, volatility has remained low compared to the currencies of most advanced economies. Early last year, Reuters reported that three state-run financial newspapers in Shanghai and Beijing advised investors to avoid Chinese currency risk and adapt to higher foreign exchange volatility.

Towards the second half of 2023, however, The People's Bank of China intensified its intervention efforts, buying yuan with the US dollar in a move designed to curb the depreciation of the currency.

Nevertheless, it is still worth comparing the exchange rates of other currencies. Quite simply, if it requires fewer pounds to settle your supplier invoice in CNY than USD, it is worth considering.

While it may seem more straightforward to stick with US dollars or sterling to reduce the company's exposure to a range of currencies, this may not be the case – your Moneycorp account manager will be able to discuss potential solutions with you that don't have to add complexity to your process.

Managing risk on scheduled payments

Paying suppliers is often done in two or three instalments in China. A standard payment schedule might look like 30% ahead of production and 70% on completion, and mass orders can have a 30:40:30 structure.

Either way, this leaves businesses open to risk from fluctuations in the market. If there's been a big swing in the exchange rates during that time, it could have a meaningful effect on the trade - whether it eats into your profit margin or swallows it up completely.

Businesses can explore Forward Contracts* to help mitigate this kind of risk. This tool allows you to hedge the rates on invoices for future payments, protecting against volatility.

At Moneycorp, we offer businesses a free currency audit to determine if there is a better strategy for approaching their foreign exchange needs. We aim to present our results clearly and precisely to help you understand the alternatives and leverage our expertise.

We offer multiple solutions to help you fix your exchange rate and manage volatility, including Forward Contracts and other services offered by Moneycorp Financial Risk Management. With these, Moneycorp allows you to fix a specific rate for up to two years. Your account manager can also help you target a particular exchange rate using Market Orders if you're not looking to purchase immediately or take advantage of the current favourable rate using a Spot Contract.

 *Forward contracts may require a deposit

None of the information contained in this article constitutes, nor should be construed as financial advice. Moneycorp Financial Risk Management Limited (company number 5774742) is registered in England.  Its registered office is at Floor 5, Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ. Moneycorp FRM is a trading name of Moneycorp Financial Risk Management Limited is authorised and regulated by the Financial Conduct Authority for the provision of designated investment business (firm reference number 452443). Moneycorp is a trading name of TTT Moneycorp Limited and is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (reference number 308919) for the provision of payment services.