The reintroduction of capital controls in China is creating myriad challenges for treasurers who have grown used to freely moving the RMB into and out of the country.
Last year the phrase “window guidance” entered the lexicon of treasury professionals operating in China – although many rather wish it hadn’t.
First issued by the country’s regulators at the beginning for 2016, the window guidance has clamped down on corporates moving RMB offshore in an effort to stem capital flows out of the country.
Initially, many corporates and bankers anticipated the window guidance to be a short-term measure. However, nearly a year on, the pain is intensifying for corporates with a new tranche of uncodified rules focused on capital flows introduced in December 2016.
According to the FT, these rules now require companies to obtain SAFE approval for capital outflows above USD$5m, such as repayment of loans or paying dividends, regardless of the currency.
To make matters more complex, there were also reports around the same time that the door was not closed. An Asia Times article, for instance, quoted a senior Chinese foreign exchange official who said that there were no restrictions on foreign firms’ cross-border profit transfers.
This, however, has not been the experience of Richard Abigail, Group Treasurer at Arup, who began to feel the impact of window guidance late last year.
Arup is a company that has been at the forefront of RMB internationalisation, including being the first corporate to operate an automated RMB sweeping structure between China and the UK outside of the Shanghai Free Trade Zone.
It is a solution that has enabled Arup to freely bring RMB into London from China, include it in the group’s notional pool and draw out funds to invest, with only a few minor restrictions. “Our sweeping structure worked perfectly and enabled us to integrate China into our global liquidity management structure,” says Abigail. “China had become a business as usual country for us.”
But for Arup and many other foreign corporates, this is no longer the case.
“Our sweeps from China have had to be terminated due to the latest tranche of capital controls,” Abigail explains. “As a result, we are now building up a pretty heavy RMB balance in China that we cannot get out.” Also, dividend payments, despite some reports, have been halted.
Abigail goes on to mention that the banks now face tougher payment to collection ratios as well, meaning that Arup’s intercompany positions have tightened somewhat.
Looking for options
Treasurers like Abigail are therefore having to consider their options. “We believe that you can repatriate cash in hard currency still,” says Abigail. “This will mean converting our RMB onshore and then seeing if we can move it offshore. This is something that we will be exploring with our bankers later this month.”
The issue for Arup, however, as Abigail explains, is that the company has a lot of invoices in China in RMB, meaning that these have to be worked through before the hard currency can be accessed.
“The experience with window guidance has once again demonstrated to us that in restricted markets nothing is certain and that it is best practice to get your cash out as quickly as possible,” he concludes.