Market Report | China
SCALING NEW HEIGHTS
The globalization of China’s currency continues at a rapid pace, as regulations ease cash pooling, renminbi trade finance accelerates, and the dim sum bond market goes gangbusters.
Major developments sometimes happen without much fanfare. One such change landed on multinational treasurers’ desks in China in November, when the People’s Bank of China issued a detailed notice on implementation of cross-border renminbi cash pools for treasury units operating outside the Shanghai Free Trade Zone (SFTZ).
Cash pooling is a technique widely used by treasurers to aggregate surplus cash balances across different accounts in order to optimize interest earned and to better manage liquidity. However, historic restrictions on the free flow of renminbi, particularly for companies operating outside of the SFTZ, have made it difficult for treasurers to incorporate excess renminbi balances across different operating subsidiaries into pooling structures in order to optimize their liquidity and working capital.
Under the new rules it is now possible for multinationals to establish cross-border pools from businesses within and outside of China. There are, however, limitations imposed on corporates. One is a cap on cross-border inflows equaling 10% of the total owners’ equity in the cash pool, a sign that the People’s Bank of China is cautious about inflows of renminbi while still wanting to encourage outflows.
However, Yigen Pei, Citibank’s head of treasury and trade solutions, China, notes that these are interim restrictions that may be lifted. Overall, he sees the new rules as an exciting development for treasurers. Losing little time, Citi announced in late December that it had initiated a cross-border pooling venture with “one of the world’s leading consumer goods companies,” without disclosing the company’s identity.
Citi was able to develop the solution quickly as an outgrowth of its experience in setting up cross-border pooling for companies within the SFTZ. The fully automatic pooling structure has allowed the company to execute cross-border renminbi sweeping by connecting its onshore and offshore structures. “The expansion of renminbi cross-border solutions to a nationwide level not only signifies the SFTZ’s positioning as a test-bed for further financial reform but also brings profound influence to the process of renminbi internationalization,” says Pei.
Another component of the currency’s growing liberalization was the concurrent lifting of restrictions on pooling foreign currencies in China, known as China FX pooling. The State Administration of Foreign Exchange, or SAFE, issued guidelines in September for foreign-currency pooling. Multinational treasurers are still making their way through the new rules, but the move is expected to accelerate FX pooling on the mainland this year.
As Pei suggests, the SFTZ has assumed the role that it was designed for when it comes to the internationalization of the renminbi by providing a gateway for eventual nationwide practices. Companies that have been early adopters are reaping the benefits. French electrical equipment maker Sonepar integrated its onshore cash pools from six mainland entities via its subsidiary in the SFTZ into its regional treasury center in Hong Kong last July, with RBS as its banker and adviser on the project. Matthieu Raffestin, senior vice president of finance for Sonepar Asia Pacific, describes the move as necessary for the company’s China growth plan. “The RBS facility means that our regional treasury center in Hong Kong is able to integrate with our China entities’ onshore renminbi cash pools,” says Raffestin. “That means we can deploy renminbi liquidity between our onshore and offshore affiliates effectively.” He calls the move “a tremendous support to our ambitious growth strategy in China.”
Companies like Sonepar that have established units within the SFTZ have also benefited from easing of restrictions on lending renminbi from onshore to offshore units. Units within the zone can lend up to 50% of their shareholder equity, while those outside the zone are limited to 30%. That means that a wholly owned foreign enterprise established in the zone can deploy its renminbi cash-pooling capabilities to remit undistributed profits to overseas-related companies with which they have an equity relationship. Companies are allowed to negotiate the interest rates on the loans without restriction between themselves, but on arms-length principles demonstrable to regulators.
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