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Apr 2010RMB Trade Settlement Scheme and Double Taxation Agreements Strengthen Hong Kong's Position in Chinese Business Landscape

By: Thaddaeus Mueller

The RMB Trade Settlement Scheme and Hong Kong

The RMB Trade Settlement Scheme is a pilot, announced by the Chinese mainland in 2009, to allow settlement in Renminbi (RMB) in the trade of Shanghai and other selected locales with Hong Kong and Macau. The pilot was begun because until the initiation of the Scheme, the RMB had seldom been used in international trade and investment transactions, which led to a severe mismatch between its global use and China's role in the global economy. In addition, the global financial turmoil has created greater volatility in foreign exchange markets, and Chinese exporters/importers and their counterparts were thus given an opportunity to use RMB in cross-border trade to reduce exchange rate risks and transaction costs.  The initial pilot strengthened Hong Kong's position as an international financial center by giving businesses the opportunity to quote and settle trade with the Chinese mainland in RMB, which allowed those businesses to manage currency risks more effectively and reduce trade settlement costs. The Scheme also fostered new growth for Hong Kong banks and the chance to develop new products and services.

The RMB Trade Settlement Scheme has now been expanded with more cities and regions on the Chinese mainland able to participate in addition to the 365 initially eligible enterprises from Shanghai, Shenzhen, Dongguan, Zhubai, and Guangzhou, and as a result, the volume of RMB trade in Hong Kong could reach RMB 2,600 billion in the next decade, according to calculations of HSBC, further strengthening Hong Kong's position as a center of international finance.

Advantages of the RMB Trade Settlement Scheme for Conducting Business in China

For companies that use Chinese suppliers, asking for a quotation in RMB and USD both may save as much as 5% because suppliers need no longer be concerned with foreign exchange and currency fluctuations. For Hong Kong suppliers to mainland Chinese customers, transactions also become easier because Chinese customers no longer need to have foreign exchange available or go through the comprehensive clearing system from the State Authority of Foreign Exchange for payment of goods from overseas.  Trade, then, in many cases, becomes easier, especially for small- and medium-sized businesses that have more ways now of conducting business.

New Double Taxation Agreements

Hong Kong has also signed new double taxation agreements (DTAs) with Brunei, Hungary, Indonesia, Kuwait, the Netherlands, and Austria, which will bring additional new business to Hong Kong and facilitate increased trade and investment opportunities. New DTAs with Ireland, Japan, Liechtenstein, Switzerland, and France are awaiting signatures, and DTA negotiations are underway with more countries.

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Thaddaeus Mueller

Author: Thaddaeus Mueller
Thaddaeus Mueller works from CDI Global's Hong Kong office.

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