Releasing Trapped Liquidity and Streamlining Treasury Operations in China

From a local currency perspective, significant headway had been made to further internationalise the renminbi (RMB). The People’s Bank of China (PBOC) recently initiated a pilot currency liquidity scheme that will allow select multinational corporations (MNCs) to centralise their management of foreign currency, including the RMB. This development is a further move by the PBOC to internationalise the RMB and to promote its use as a settlement currency for trade, investment and industry expansion.

Encouraging Regional Treasury Centralisation

On the foreign currency front, China’s State Administration of Foreign Exchange (SAFE) has piloted three main initiatives to encourage China’s ambition of establishing itself as an international financial centre.

• The first initiative, consisting so far of only 13 corporates and five international banks, is a programme that allows foreign currency depositors in China to participate in cross-border sweeping, subject to an approved quota. While the funds can be swept into and out of China via the controlled cross-border master account, there are no specific restrictions on how the foreign currency can be deployed once offshore.
• A second initiative authorises payments-on-behalf-of (POBO) structures for centralised foreign currency payment and collections. This is done through the corporate nominating a centralised entity to manage incoming and outgoing foreign currency fund transfers on behalf of the corporate’s multiple entities in China.
• The third initiative, which can help treasurers, centres on a formalised set of rules to establish and run a netting structure proposed by SAFE. This will allow corporates to benefit from inter-company payments, taking away the need to ‘gross settle’ all cross-border transactions.

Dual-Pronged Approach

These foreign and local currency liquidity initiatives undertaken by the Chinese government in recent years point to a move towards the internationalisation of the RMB and the opening up of the economy. Both will encourage corporates to base their regional treasury structures within China to be close to their major Asian markets through efficient cash management structures.

The figure below summarises the various initiatives that are currently running on a pilot basis.

Figure 1: Pilot initiatives to Establish China as an International Finance Centre (IFC).

 *Chinese Local Enterprises can use the RMB outside of China for working capital only.

**POBO: Payments On Behalf Of: ROBO: Receivables On Behalf Of

  Source: Standard Chartered.

Opportunities to Centralise Payment and Treasury Management Structures

The RMB initiatives so far are characteristic of Chinese regulators’ preference to proceed cautiously in order to maintain stability within the financial system. At the same time listening and progressively changing to meet the needs of the business and investment community within China is also part of their remit.

From a business perspective, corporates will benefit from being able to:

1. Exercise efficient working capital management (unlocking trapped liquidity): The liberalisation of foreign exchange (FX) restrictions allows treasurers to optimise the use of previously trapped liquidity for a variety of purposes outside of China. Once approved by the regulators, funds that have been moved offshore can be utilised for working capital, investment, business expansion and hedging purposes. Formalising guidelines for netting structures also enable greater working capital efficiency for MNCs by increasing control and reducing FX risk through the reduction of non-functional currency accounts.
2. Streamline operational processes: Some corporates may also take advantage of these initiatives to setup a regional treasury centre or payment factory in China, and benefit from the programmes put in place with cash pooling hubs in Shanghai and Beijing. The relaxation of rules around payments-on-behalf-of (POBO) will allow a corporate to centralise its payments and collections in a location closer to the corporate’s regional operations base in China.
3. Manage FX risks: From a Chinese corporate’s perspective, the ability to combine payments in foreign currency through a payment factory structure can benefit from the ability to:
   – Consolidate FX risks into core currencies within a centralised structure without the need to manage multiple local currency accounts.
   – Gross up FX requirements to allow the corporate to reduce the cost impact of foreign currency transactions.
   – Transfer and convert foreign currency to allow hedging against currency risks incurred as a result of international trade settlement obligations.

China’s Currency Liberalisation

Corporates looking to prepare themselves for a still more liberalised currency regime often feel daunted when attempting to understand the programmes and integrate the Chinese initiatives to deliver greater efficiencies.

The figure below offers some considerations and possible actions that can be taken.

Figure 2: Checklist for Corporates Preparing for China’s Currency Liberalisation.

Source: Standard Chartered.

Treasurers, especially those with large cash volumes in China, would do well to seek advice from banking partners with rich experience in treasury centralisation and which have on-the-ground knowledge of currency management in China and the emerging markets, as they seek to navigate the liberalisation of RMB.