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.