Last week, the People’s Bank of China announced that it intended to allow corporates based in the country to carry out two-way cross-border pooling, finally enabling these operations to be incorporated into a global cash pool. The details are still to be finalised, but Treasury Today speaks to several industry experts about what this means for corporates operating in the country.
Two-way cross-border renminbi pooling may soon be a nationwide reality according to guidelines released by the People’s Bank of China (PBOC) on 11th June 2014. Section five of the Opinions of the State Council on Supporting the Stable Growth of External Trade announced that, “Multinational companies may conduct cross-border RMB fund centralised management business in accordance with the regulations and provisions of the PBOC, including cross-border two-way fund pooling, centralised payment and receipt of RMB fund for current account transactions [sic].” While these are just guidelines they set the agenda and indicate further renminbi internationalisation.
China has gradually been moving towards this announcement, having introduced limited one-way sweeping in 2013 and then establishing two-way cross-border sweeping in the Shanghai Free Trade Zone (SFTZ) earlier this year. The guidelines, once implemented, will allow multinational corporates across China to fully integrate their operations in the country into their global cash pool.
The guidelines state that multinationals will be required to elect one of their legally registered Chinese companies to become the cross-border pooling entity. The entity will subsequently be able to centralise cross-border payments and collections, netting cross-border settlements. This will allow corporates to avoid having to seek approval from the State Administration of Foreign Exchange (SAFE) each time they transfer funds cross-border. “This is something that should make all treasurers very happy,” says David Blair, Managing Director at Acarate.
The proposed changes will benefit the majority of multinational corporates operating in China. “Multinationals with significant deficits in other countries have a strong incentive to cover these with surplus renminbi liquidity they have accrued in China,” says Vina Cheung, Global Head of RMB Internationalisation, HSBC Global Payments and Cash Management. “For these companies the effort to integrate China into their existing global or regional liquidity structures is worthwhile.”
Even those companies without pressing deficits can benefit from the changes. “For multinationals without pressing deficits elsewhere the centralisation and standardisation of RMB into global liquidity management processes may not appear to yield a substantive monetary return,” says Cheung. “However, this misses the fundamental point that opportunities exist for payment and invoicing processes, together with associated FX and process risk elements, to be further standardised and centralised. These are important building blocks which augment the efficiency of, for example, just-in-time funding, which in turn increases the degree of mobility and the intrinsic value of internally generated liquidity.”
The announcement follows a trial period of two-way cross-border renminbi pooling in the SFTZ. “The pilot in the SFTZ has been successful and a number of companies have established two-way cross-border pooling and centralised their payment collections,” says Louise Zhang, Head of Product Management for Greater China, Global Transaction Banking, at Deutsche Bank. “We expect to see the rules established nationwide to replicate those of the SFTZ.” The timing of the announcement has come earlier than most expected. For Zhang this is down to the success of the SFTZ trial and importance of renminbi internationalisation for the Chinese government. “When taking into consideration these factors, it isn’t very surprising that they are looking to implement this nationwide soon,” she says.
Currently the PBOC is in the process of drafting the full legislation. Despite the lack of information regarding the go live date, the central bank has made clear that the new scheme is being launched to support the real economy and that both corporates and banks have to ensure that funds are used for working capital. “The PBOC wants to facilitate multinational corporate cash management, without encouraging hot money flows that are likely to inflate bubbles onshore and drive economic volatility,” says Blair. “This is not the full opening of the capital account.” Blair also believes there are likely to remain some restrictions, for example which companies can take part in the pooling, and also quotas on the amounts. “There is also likely to remain some reporting which needs to be completed by corporates, although this is unlikely to be very onerous.”
For corporates who have been looking to establish an entity in the SFTZ, the latest announcement creates an interesting predicament. “These companies are likely now to wait for the full details of the regulation before deciding if they wish to move to Shanghai or operate elsewhere,” says Zhang. “Many banks, including Deutsche Bank, have implemented deals in the SFTZ, and these can be used as a good example for how corporates can establish their pooling structure in the SFTZ and eventually nationwide.”
The general feeling is that the guidelines represent a big step for China; Cheung comments that “the ability for moving and sweeping renminbi funds between China and offshore entities definitely marks a key milestone on its internationalisation journey in the eyes of corporate treasurers.” The move also opens up China for multinational corporates. “It offers the potential for corporates to run their day-to-day operations in accordance with global best practice,” says Blair. And while there is still plenty of room for development, the initial signs are positive, confirms Zhang: “It is certainly a great development for operations in China”.