The Chinese authorities have launched a pilot scheme to centralise foreign currency management for multinational companies. Intel and HSBC are the first foreign entities to establish a cross-border sweeping structure, whereby the company can include its Chinese treasury operations in its cash concentration efforts in order to reduce external borrowing and improve returns.
Intel, in partnership with HSBC, has been approved to establish an automated, cross-border, sweeping structure in China. The pilot scheme, which is carefully managed by the Chinese authorities, aims to centralise foreign currency management for multinational companies. This new development marks another step in the on-going opening up of China as an international treasury centre and a recognised global financial centre.
The pilot scheme was open to a small group of selected Chinese and foreign invested multinational corporates and banks in Shanghai and Beijing. Robert Yenko, Treasurer of Intel, Asia, says: “We are pleased to participate in this pilot transaction and believe that it has tremendous benefits for treasury management as a whole. This development opens up many more options for cross-border liquidity management, which is very important to us.”
The company selected HSBC as its banking partner for this transaction because of the bank’s international network, expertise in liquidity management and understanding of the treasury landscape in China. “This positive development was the result of extensive collaboration between Intel and China’s foreign exchange (FX) regulators to support the Chinese government’s move to advance and further internationalise liquidity management in China,” says Yenko.
HSBC and Intel worked jointly with authorities on the pilot scheme, which required close co-operation and collaboration in the feasibility and implementation stages. The regulatory authorities primarily drove the programme, whilst HSBC and Intel were pleased to see that the feedback and consultations enabled the authorities to better evaluate the risks and provide the eventual approval.
Currently, there is no limitation on the foreign currencies that can be included in the liquidity basket, apart from the renminbi (RMB). However, for the purpose of the pilots, there is an expectation that it will be denominated in a singular currency, e.g. US dollar, in order to keep the implementation simple.
Multinational companies sweep their excess cash, held in various major trading currencies from around the world, into one liquidity basket to enhance their return on excess liquidity and optimise their cash management structures. This form of liquidity management:
Helps companies’ financial return by using their own cash to reduce external borrowing.
Improves risk control through centralised liquidity management and FX exposure hedging.
Optimises companies’ key liquidity and leverage ratios.
China’s prevailing foreign currency control policies have been the main obstacle to cross-border sweeping. “Simply speaking,” says Kee Joo Wong, HSBC’s Head of Payments and Cash Management in China, “any foreign currency cross-border transfer is subject to either documentary evidence or regulatory approval.”
China is one example but there are other Asian countries with restrictions that apply to cross-border funds transfer. Apart from Singapore, Hong Kong, Australia, New Zealand and Japan, other jurisdictions in Asia have varying degrees of restriction when it comes to cross-border sweeping due to FX controls for inflows and outflows.
Wong believes that this pilot programme will, to some extent, help to address trapped cash issues, as treasurers can now have more confidence knowing that their excess cash held in China can be used for daily funding needs in their business. “Companies involved in this pilot programme will potentially be able to optimise the utilisation of China’s surplus cash,” he explains. “However, it is also important to note that the issue involves more than just foreign currency control. Hence, companies still need to study the impact from other aspects, such as tax and legal structures in China.”
One step forwards
Cross-border sweeping is a crucial step in helping China to establish global financial centres, as it gradually opens up to the rest of the world. “This new development certainly puts China on a different playing field,” says Wong, “but I would say it is still early days, given that the scheme is still in pilot and will probably require more adjustments before rolling it out to a wider audience. However, when eventually rolled out, we foresee that this change – coupled with potentially new regulatory changes – will lead to more treasurers looking to set up their regional treasury centres in China.”
Currently, the Chinese authorities have not provided a timeline as to how long the pilot scheme will continue. “There is a saying in China: ‘cross the river by feeling the stones,” says Wong. Hence, the pilot programme will run for as long as the regulators deem it necessary to make adjustments prior to releasing it to a wider audience. “This will also depend on the success of the pilots. We expect that this could potentially take place within the next six to 12 months.”