Connecting China into the Global Business
by Bruno Francois, Head of Transaction Banking, Greater China, and Laura Milani, Liquidity Management Marketing Director, BNP Paribas
The past five years have witnessed enormous developments towards currency and fiscal liberalisation in China, with the RMB now the fifth largest global payments currency, and the second most popular currency for trade finance, (source: SWIFT). This reflects growing confidence in the use of RMB as a trade and investment currency amongst market participants, with an increasing range of opportunities for mobilising RMB, not only within China but across borders. In 2014, PBoC (People’s Bank of China) took a major step forward in encouraging corporations to invest in China and adopt RMB by permitting onshore RMB balances to be connected to cross-border cash pooling structures.
Background to RMB cross-border cash pooling
The RMB internationalisation programme first started in 2009 with the initial launch of the pilot cross-border trade settlement programme, and gradual progress towards currency liberalisation has been ongoing since then. A key milestone in this process was in September 2013, with the launch of the China (Shanghai) Pilot Free Trade Zone (SFTZ). The intention was to expedite regulatory and administrative transformation, stimulate trade and investment and gain experience of an open economy. The inclusion of ‘China’ and ‘Pilot in the title is important, reflecting that the free trade zone is intended to be an incubator for trialling new regulatory and administrative measures before expanding their scope more widely across China.
A milestone development
In February 2014, entities in the SFTZ were allowed the opportunity to include onshore RMB (CNY) balances in two-way cross-border cash pools for the first time with only limited conditions. Specifically, a registered entity in the SFTZ needs to act as the pool header, and only cash flows generated from operating activities (i.e., not borrowed funds) can be included. No approval is required, and flows within the cash pool are not subject to a quota. As a major step in the journey towards currency and fiscal liberalisation, it is perhaps surprising that the announcement was initially met with relatively little enthusiasm from the corporate community. There are a variety of reasons for this:
- Firstly, the SFTZ at that time comprised 28.78 km2, consisting of four existing bonded zones: Waigaoqiao Free Trade Zone; Waigaoqiao Free Trade Logistics Park; Yangshan Free Trade Port Area; and Pudong Airport Comprehensive Free Trade Zone. For many organisations, these areas were not necessarily the best location for their business, and did not match the aspirations of many corporations.
- Secondly, with a rapid pace of regulatory change in recent years, many treasurers have adopted a ‘wait and see’ strategy, fearing that acting now could make it more difficult to take advantage of further changes ahead.
- Thirdly, there are examples of corporations where treasury centres outside China are not made fully aware of evolving opportunities by the treasury centre in China, perhaps fearing a loss of autonomy.
An expanding reach
In July 2014, the ability to include CNY balances in cross-border cash pools was extended to entities across China, a move that was widely welcomed. However, the restrictions are far more stringent. For example, entities need to have been incorporated in China for a minimum of three years, with a minimum turnover both in China and globally. In addition, the sweep amounts are subject to a quota. Together, these conditions are considered overly restrictive for many corporations. Now that market participants have become familiar with the two options that are available, they are in a better position to make a decision about how important cross-border cash pooling is for their business.
For many organisations, this decision has become easier with the recent suggestion that the geographic reach of the SFTZ would be expanded to an area of 120.27km2, include the Lujiazui financial district, Jinqiao development zone and Zhangjiang hi-tech park, all of which are in Shanghai’s Pudong district, although this has not yet been officially confirmed. With the inclusion of Lujiazui, in particular, the city’s financial hub and the location of a large number of regional headquarters for both multinational and Chinese companies, a far larger number of corporations have become part of the SFTZ and can therefore leverage the opportunities. In addition, as treasurers become more familiar with the progress of currency and fiscal liberalisation in China, they recognise that as the pace of progress is unknown, it is better to act on the opportunities now rather than wait for an uncertain future.