Cline Zhang
Director, Cash Liquidity Head, CTS China
Director, Shanghai Free Trade Zone Branch Manager, Citi China
Cline Zhang joined Citi China in April 2004 and has worked in various roles including Country Liquidity and Investment Product Head and Trade Product Head and Regional Cash Product Manager. Zhang expanded her role to be Deputy Branch Manager of Citi Shanghai Branch in February 2013 and was appointed as Shanghai Free Trade Zone Branch Manager in November 2013. Before joining Citi, Zhang worked in the credit card centre of Bank of China for four years.
Given the pace at which the Chinese financial authorities are now liberalising foreign currency (FCY) activity in the country, it may soon be necessary to stop referring to it as ‘the dawn of a new era’ in liquidity management for multinational corporates (MNCs) and to start thinking in terms of a point later in the metaphorical day.
The fact is that as exchange controls in China bow out one by one, the threats of regulatory trapped cash and burdensome paperwork for corporates correspondingly fill the history books. The country is open for business in more ways than one.
Following a successful trial in the Shanghai Free Trade Zone (SFTZ), since 1st June 2014, companies based anywhere in China have been able to establish, with relative ease, centralised FCY cash management programmes. This move by China’s foreign exchange regulator, the State Administration for Foreign Exchange (SAFE), is yet another example of how the Chinese authorities are intelligently managing the lessening of foreign exchange restrictions rather than shocking the system with rapid-fire releases of untested programmes.
Indeed, although approved MNCs with accumulations of onshore foreign currency have been permitted to execute two-way transactions independent of the SFTZ since 2012, the June 2014 actions taken by SAFE further diminished the reporting burdens imposed on those companies and can be seen as a measured response to an obvious commercial need. Now, all qualified MNCs are free to establish payment-on-behalf-of (POBO) or receipt-on-behalf-of (ROBO) structures simply by submitting a single request to their local SAFE branch.
Citi’s Head of Liquidity Management Services, China, and SFTZ Branch Manager, Cline Zhang, has first-hand experience of the changes being implemented by the Chinese authorities. In essence, she sees SAFE as taking positive steps to simplify cross-border transactions, including those around cross-border import/export and trade services transactions. There is, she notes, also a higher level of support for capital account liberalisation for corporates and banks based in the SFTZ aimed at reducing funding costs for ‘mainland’ firms (those in the rest of China) and giving foreign capital greater freedom in accessing the Chinese market.
Of importance too, says Zhang, is how the authorities are now starting to move towards more capital liberalisation. “SAFE is starting to open doors to allow China companies to operate two-way cross-border pooling,” she notes. “It means they can borrow from and lend to offshore registered companies which will reduce their finance costs and provide efficiencies for their daily operations.”
A real solution
The importance of the involvement of locally-based major institutions such as Citi in shaping the progressive foreign currency environment in China should not be underestimated. In 2012, when SAFE started to consider cross-border POBO/ROBO structures, Citi was invited to participate in regulatory framework discussions, says Zhang. The input was not just based on Citi’s own international banking perspective; at the time Citi worked closely with SAFE to help provide feedback on “real business needs” from the bank’s corporate clients; something it continues to do. The obvious end result of this co-operative approach from all stakeholders is a practical framework for companies.
This translates into a simplified SAFE foreign currency programme around cross-border pooling, for example, that meets the dual needs of China ‘mainland’ and SFTZ-based businesses, whereas the RMB programme (managed by the Peoples Bank of China) has divergent criteria in terms of quota, qualification and filing/approval for SFTZ and the mainland.
In practical terms, SAFE FCY rules on cross-border pooling apply to both SFTZ and mainland firms. The limit on borrowing for corporates, for example, is equal to the total unused foreign debt quota (FDQ). The lending cap for both is set at 50% of total equity.
The rules on SAFE FCY qualification for cross-border pooling requires applicants to demonstrate cross-border receipts and payments of more than $100m in the previous year, and there must have been no material violation in FCY business in the past three years. A further qualification is for all participants to fall within SAFE’s Category A. Enterprises are classed based on their foreign exchange receipts and payments and their trade compliance with SAFE provisions. A is the highest grade.
Filing and approval, as mentioned above, simply requires submission of documents to the local SAFE office. SAFE has branches and offices in all cities and provinces across China.
Opportunities
The work that has been carried out so far by SAFE and the other stakeholders around FCY, including Citi, is not just an exercise in administration; it has real value in terms of corporate opportunity, says Zhang. The desirability of uptake depends of course on a company’s cross-border settlement currency but she notes that businesses for whom it is applicable will find that they can reduce their cost of finance where they are permitted to borrow offshore. “They can also lower transaction costs,” she adds. “For example, where they operate a USD netting programme, FX costs can be reduced significantly.”
Companies will also be able to improve operational efficiency by implementing a POBO/ROBO facility to centralise transaction execution and, Zhang explains, it is increasingly viable to include China in a company’s global cross-border pooling programme. Of those corporates that have seen the opportunity here, the tendency so far is to focus on USD cross-border pooling “because it saves on finance costs; it is an immediate benefit for treasurers.”
As a trusted service provider, Citi is geared to helping its clients understand the business impact of the rules as they change, says Zhang. “We usually hold several client webinars as soon as there is new regulation announced,” she explains. For some clients, the bank is able to help build up communication channels with local SAFE officials. From this its position as an ‘on-the-ground’ intermediary – with a long history of active engagement with the financial authorities – Citi can actively provide feedback on client demand to SAFE to help build out future requirements, and of course relay any developments around the structure of regulation, and the appropriate response, back to its clients.
Gathering pace
The discussion between stakeholders is ongoing and certain limitations still exist around FCY accounts, such as the quota controls mentioned above. “We understand the background of these limitations,” says Zhang. “The financial industry is very new and different for China; it is natural that any innovation or move towards de-regulation must be taken step by step.”
That it is taking a cautious approach to opening up the markets is entirely within reason. SAFE is likely to persist along the lines of de-regulation and capital liberalisation as China realises its support of real business needs and the advantages of reduced cost of finance. Indeed, the ‘open for business’ mantra received yet another boost in mid-February when PBOC unveiled another SFTZ regulation, this time allowing entities within the zone to borrow USD from offshore banks – news it shared alongside the announcement that it is also committed to looking for more flexibility around FX conversion.
The step-by-step approach to de-regulation in China seems to have moved up a notch in recent months, from a walking pace to a gentle jog. Whilst an out-and-out regulatory sprint is unlikely and indeed unadvisable, it is incumbent upon those with deep local knowledge of the financial space to stay ahead of the curve. For Zhang and Citi, this not only means understanding China’s local market developments and trend towards de-regulation, but it also requires the bank to maintain its position as a trusted advisor to its clients. “It is also vital that we provide optimal service and technology to ensure clients can run their businesses smoothly,” she asserts.
There is more work to be done before cross-border cash flows in and out of China are as comfortable a proposition for corporates as they are in Singapore or Hong Kong, for example. As the pace of regulatory change in China gathers momentum, corporates looking to extract maximum advantage should be looking to build a long-term plan and would do well to seek out a banking partner with the reach and connections to stay ahead of the game.
There is no doubt now that the Chinese regulators are firmly committed to supporting trade and easing FCY transaction risks faced by businesses operating in the country. “Corporates can already benefit from de-regulation of cross-border FCY controls,” states Zhang. “China is no longer a ‘trapped-liquidity’ country. Entities here can safely include it within their regional or global treasury scope, allowing them to leverage centrally managed inter-group funding via FCY cross-border pooling.”
