Photo of Steven Elms, Citi collecting on behalf of Yannick Gehin and Joy Macknight.
This case study showcases a recently launched pilot scheme for RMB cross-border lending. In order to comply with transfer pricing regulations, the interest rate was often set with reference to the onshore PBOC benchmark deposit rate.
Yannick Gehin
Regional Treasurer Asia Pacific, Singapore
Danone is a multinational company (MNC) operating in the food industry. The company holds top positions in healthy food through four businesses: Fresh Dairy Products, Baby Nutrition, Waters and Medical Nutrition. Danone has over 190 production plants and around 102,000 employees. In 2012, the company generated sales of over €20 billion, of which more than 50% were in emerging countries.
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With the help of Citi, Danone participated in the People’s Bank of China’s (PBoC) newly launched pilot scheme for renminbi (RMB) cross-border lending. By pioneering RMB cross-border lending, Danone has been able to complete a critical step in its expansion plans by adding RMB to its treasury management currency basket, and thus leverage surplus RMB in China to finance the net debt of its regional treasury centre (RTC) in Singapore. The structure optimises Danone’s treasury activities to realise improved global liquidity management and greater efficiency.
The transaction sets an important precedent both for Danone and other multinational corporations (MNCs) seeking to include RMB in their global cash pools and optimise liquidity management. It is also a valuable first step in becoming familiar with RMB as an operating currency offshore. By participating in the PBoC’s newly launched pilot scheme for RMB cross-border lending, Danone has positioned itself as a pioneer in RMB cross-border lending and has been able to leverage surplus RMB in China to finance the net debt of the group’s regional treasury centre in Singapore.
As Yannick Gehin, Regional Treasurer Asia Pacific, explains: “Danone has a long-term ambition to enhance global liquidity management and had built up a large onshore RMB surplus in China. Under current regulations, it was not possible to leverage this surplus for inter-company financing purposes. In terms of the pilot scheme, there were a variety of pre-requisites for RMB cross-border lending that Danone needed to satisfy.”
The time taken to implement this solution and realise the benefits has been remarkable.
An eligible company must be a registered company in a pilot city, which was Shanghai in Danone’s case, and companies could lend directly or by using funding in its cash pool. They also need to have a structural cash surplus in RMB with no outstanding RMB-denominated borrowings. In order to adhere to transfer pricing regulations, the interest rate was often set with reference to the onshore PBoC benchmark deposit rate. Inter-company contracts were drawn up between Danone’s group offices in China and Singapore with dedicated accounts in RMB. The loan was then swapped into US dollar, the functional currency for its Singapore-based holding company.
Danone conducted the first transaction under the pilot scheme on 24th January 2013, having obtained approval within three months of Citi initially approaching the company about the pilot scheme. The rapidity with which the transaction was concluded under the pilot scheme and the ability for Danone to achieve its global liquidity ambitions was due largely to the effective communication between Citi, PBoC and Danone.
Gehin concludes: “The time taken to implement this solution and realise the benefits has been remarkable.”
The transaction sets an important precedent both for Danone and other multinational corporations seeking to include RMB in their global cash pools and optimise liquidity management. It is also a valuable first step in becoming familiar with RMB as an operating currency offshore.
