China’s regulatory framework is complex and the pace of change is challenging for corporates to navigate. Added to this, the Covid pandemic has made it more difficult for international companies to understand from a distance what is happening on the ground.
The world has become accustomed to virtual meetings, to the etiquette of Zoom, and conducting business from afar. Going digital and doing things virtually has worked for most, but some things have been lost from the working culture of corporates during the pandemic. And it’s not just conversations by the watercooler, or while making tea in the staff kitchen that are now missed.
For international companies that need to stay on top of the latest regulatory developments in China, the pandemic has proved challenging, especially if they are trying to keep pace with the developments from afar. The lack of face-to-face, in-person meetings with the team in China means that it has been harder to keep abreast of the complexity, nuances and background information of the latest regulations.
Tony Wood, Partner, at Deloitte China comments that managing, and staying on top of, the latest regulations has become more challenging as a result of the pandemic. While this issue isn’t unique to China, the lack of travel to the mainland has meant it has become more challenging for multinationals to understand the latest developments from afar. “The inability for foreign companies and management to travel to China has made things more challenging,” comments Wood. “There has been a shift to the onshore management of regulations,” he adds.
In the past, managers may have frequently travelled from Hong Kong, but now they have not been to China for over two years, he explains. This is having a knock-on effect on how such regulations are being approached. And for executives at multinationals who may have made an annual trip to China, the lack of face-to-face time with people on the ground means they have missed out on really understanding the intricacies and direction of the local regulation. “Firms are increasingly reliant on onshore management to reflect the consistent view of law and regulation,” says Wood.
And even though there has been a global pandemic, there was no slowing in the pace of Chinese regulation. China is both seeking to relax regulations and liberalise its economy and at the same time it is seeking to restrict and control how that is done.
The regulatory environment is challenging for corporate treasurers. Xuelin Chen, Director of Group Treasury at Trip.com Group – based in Shanghai – comments on the challenges in staying on top of China’s various regulations. “The pace of change is definitely a challenge,” she tells Treasury Today Asia.
“The other big challenge is the interpretation of laws and regulations by different levels of authorities. The Chinese language is not a precise language and the laws are sometimes phrased in a way where there could be different interpretations. As a result local governments give different guidance to companies and sometimes the applications of rules can be very different. From time to time central government and regulators issue circulars attempting to clarify and align nationwide practices. However, those only correct a small part of the problem,” Chen explains. Trip.com Group has a presence in a number of different regions in China and these are the kind of difficulties that she encounters on a daily basis, she adds.
This is the kind of complexity that has to be managed on a daily basis by treasury teams on the ground in China. And for managers that are based elsewhere, it is even more difficult for them to get a handle on what kinds of demands are being made on their treasuries.
International companies that have a presence in various countries find the regulation in China unique in many respects. China, unlike other countries, still has a relatively-short history when it comes to law-making, notes Wood at Deloitte, and it is possible for companies to get overwhelmed by the volume and the pace of regulation and keeping up with it. Wood comments that he thinks the larger companies have a better handle on getting clarity on the more complicated law and regulations.
Those large companies may have the resources to effectively invest the time and energy in understanding the complexities of Chinese regulation. But for those who are not based in China, they have had to increasingly rely on the teams on the ground.
For those working onshore in China, there are so many regulatory issues that are a priority for them. If you ask different treasurers what regulations are top of mind at the moment, they are likely to give you different responses.
When asked what the big regulatory trends are in China right now, for example, Vivian Peng, Asia Pacific Treasurer at Flex, comments that the top three regulations that are often discussed and seem to be the top of the agenda are the regulations under capital account cross-border flow, such as cross-border lending and borrowing, and dividends. Also, the internationalisation of the renminbi (RMB) and the rules surrounding it are a big topic. And finally, the policy regarding the CNY exchange rate is also up there in the priority list, according to Peng.
Chen at Trip.com Group comments that if she were to pick the key regulations that are top of mind for corporate treasurers and chief financial officers in China, it would be around tax. She explains, “In my opinion the most important regulation is the tax law, especially corporate income tax and VAT [value-added tax]. There are frequent updates to existing tax rules and regulations, and conditions have to be satisfied by a company in order to receive favourable tax rates that vary from city to city. Within the same city, interpretation of tax laws by district tax bureaus can be different therefore companies may have to follow different guidance by their respective tax bureaus. The relationship with the district and city tax bureaus need to be maintained regularly so there is mutual understanding of the company’s tax practices and compliance.”
Amid these developments there are also broader trends at play that affect regulation in China, and elsewhere. Environmental, social and governance (ESG) topics are hot right now everywhere, and this also applies to those that need to stay on top of Chinese regulations. Peng at Flex comments that ESG is up there in the top lists for corporate treasurers. And this is also in line with a finding by professional services firm PwC in its ‘Regulatory Hot Issues’ report from August 2021. There, PwC states that in recent months, green and sustainable finance has found its way to the top of the to-do list for most financial institutions. And in turn, this also has implications for corporate treasury.
On the topic of ESG, which is much broader than treasury, Wood comments on China’s ambitious targets: it has a target of 2060 for carbon neutrality and has also set a target of reaching peak emissions by 2030. “We anticipate there will be more regulation coming with ESG,” says Wood, adding that interest in the subject has increased very quickly in recent months for his clients. “Looking forward, this regulation will enable the transition of Chinese companies and sectors to have lower carbon footprints. These are huge opportunities and companies will have to invest heavily in understanding these rules and regulations,” says Wood.
This is just one of the major themes that are affecting the regulatory environment in China at the moment. Another major regulatory topic is related to data and privacy, which Peng flags as potentially having an impact for corporate treasurers.
Data concerns have featured in high-profile examples of technology companies that have fallen foul of regulations, which has impacted their overseas listings. This, and other regulation of the technology sector, has had massive implications for some companies – as Treasury Today Asia has previously reported.
The regulatory crackdown on the tech sector has also exposed the divisions in China between its ‘hawks’ and ‘doves’ who are divided over whether Chinese companies’ expansion overseas should be encouraged – and opened up to foreign capital – or whether they should be reined in and restricted.
The issues with the tech sector show how just a single sector can be exposed to the regulation of a number of agencies, including the Cyberspace Administration of China (CAC) which is increasingly making headlines with its regulation of data and privacy. The issues also exposes the debate about whether the regulation is to be expected, given that the tech companies, particularly the platform companies, are handling vast troves of data – sometimes financial – and that needs to be tightly regulated. The Financial Times estimates that the regulatory crackdown has wiped approximately US$2trn off the market of listed technology companies in the last year.
Wood at Deloitte comments that with the data and privacy laws in China – it’s not more of the same, but rather a continued development of those regulations and their application. Also, he adds, many corporates now have greater understanding on how these rules should be applied.
Chen at Trip.com Group notes that data is a hot topic, as well as anti-monopoly regulations, which she says are likely to be top of mind for corporate treasurers and CFOs. She tells Treasury Today Asia, “Anti-monopoly regulations and data privacy have become an important focus since last year, after a few historical fines to certain big internet companies over their market practices and data handling as ‘example-setting’ cases by the authority.”
These are some of the issues that have been dominating headlines in recent months. And then another major, relatively new trend is that of cryptocurrencies and digital currencies. In China, much attention has been paid to the e-CNY project, China’s central bank digital currency and how it is progressing. Treasury Today Asia has previously reported on the opportunities of the currency – which is viewed as a digital replacement for cash – and how treasurers need to be prepared.
And as far as cryptocurrencies – such as Bitcoin – are concerned, China has taken action to ensure that individuals and companies do not speculate on what is viewed as a highly-volatile asset. Wood notes that the Chinese authorities have been clear about not wanting third party or retail speculation in cryptocurrencies, which, in the context of the recent huge swings of volatility in cryptocurrency markets, has been seen as a positive for Chinese investors.
Besides, for many corporates, crypto and digital assets are still a bit futuristic, particularly for large, traditional firms. This is something that Peng agrees with and she comments crypto is still a long way off for traditional industries to start considering.
Crypto is one hot topic for regulators, and China is seeking to control the fallout that might occur if there is a dramatic drop in the value of crypto assets. On the one hand China is seeking to restrict and control, and then on the other it wants to liberalise and encourage new investment.
One such opportunity with investment in the Greater Bay Area – is a project that brings nine cities in mainland China and Hong Kong and Macau into an area where they are linked into a ‘megalopolis’.
Gordon Orr, an advisor for consultancy McKinsey, discusses the benefits of the project in a blog post and notes that the GBA region has been growing faster than the average across China. “It’s been part of the continuing shift of the centre of gravity of China’s economic activity. It’s been moving south for 30 years, and you’re really seeing it now. What you’ve got now is a cocktail of inputs that’s really ready to bubble up.”
Orr continues: “This is the youngest region in China. It’s the most educated, most talent rich region in China. It’s enormously capital rich. It’s got fantastic infrastructure, and it’s got this unique thing with Hong Kong connected to it that creates a global capability and global connectivity to capital and professional services that’s unique.”
The PwC Hot Issues report notes that this area is an opportunity that requires strategic action on the part of financial institutions, especially since China’s regulatory authorities have issued guidance on how the region will be opened up and developed. The most recently issued circulars, for example, cover issues such as economic development, facilitating trade and investment, and promoting the internationalisation of the RMB.
Wood anticipates there will be greater liberalisation with geographies such as the Greater Bay Area (GBA), and also with certain sectors, such as financial services. However, he notes, that liberalisation goes hand in hand with more regulation and rule-making “I feel the two things go hand in hand. We are not going to see a laissez-faire market opening,” he comments. Such opening up, and increased regulation, will need to be understood and managed onshore in mainland China, which in turn will create a continued demand for talent.
Despite the challenges, China’s prospects are buoyant, even though it has been badly affected by Covid and has undergone severe lockdowns. The prospects for China also include opportunities for Hong Kong as a financial centre. Or, in the words of Edmond Lau, Senior Executive Director of the Hong Kong Monetary Authority, “The message for the financial industry is clear: no long-term strategy is credible without China. And no China strategy is complete without Hong Kong.”
More broadly, Deloitte’s Wood puts the development of the laws and regulation in China in the context of its economic liberalisation and the opportunities that exist for multinationals. “China still presents significant growth and economic opportunities for many companies despite the challenges of the past few years,” says Wood at Deloitte.
He adds that China is committed to market opening and liberalisation through its economic plan, and this also includes a commitment to Hong Kong as an international financial centre. “I remain highly optimistic that the economy of China will remain attractive for many companies,” says Wood.
When discussing the challenges with navigating all of this, Peng at Flex comments that the regulations in China are being relaxed every year. “I think the key to understand the regulation is to understand the logic and rationale of the policy, which needs the treasurer’s understanding of macro economy of China and the world,” she says.