China: New Possibilities in a Promised Land
For any company struggling for sales and revenue growth in a
sluggish global economy, China can appear like a ‘Promised Land’: a place of
fabulous opportunity, but just out of reach. Historically much of the problem,
particularly for companies with limited network or resources, has been
navigating the restrictions and bureaucracy surrounding managing cash flow.
However, a raft of recent regulatory changes have streamlined cross-border
payment approvals, cleared new channels for repatriating excess revenue, and
brought international cash management optimisation into the realm of everyday
operations in China.
The full impact of these changes is only just being
felt. Companies with significant China exposure are moving their treasury
operations eastwards, companies are gaining more confidence to attempt breaking
into the world’s most dynamic economy, and Chinese consumers are benefitting
from lower prices as transaction costs fall.
Treasury and cash management
reform in China has, in recent years, followed a well-established pattern: new
regulations would be tested on a small number of companies – typically domestic
state owned enterprises and foreign multinational corporations (MNCs) – in
selected cities before being rolled out to wider business groups in wider
Although that model is still being used, the State
Administration of Foreign Exchange (SAFE), the part of the People’s Bank of
China (PBOC) that overseas cross-border payments, has recently accelerated the
The clearest indication of the new pace came at the start of
September when regulators abolished the need for SAFE approval for cross-border
service payments, although for sums over US$50,000 companies still need to
submit supporting documents from the ultimate beneficiary and give notice to the
tax authorities before transferring the funds.
At a stroke the authorities
have reduced the time to clear a service transaction from weeks, or sometimes
months, to a couple of days.
Although they were introduced faster and are
broader in their application, the new services payments regulations echo similar
streamlining in the physical trade sector over the past year.
The Chinese regulator has been breaking new ground with cash
management deregulation. Over recent months, it has, for the first time, become
possible for MNCs to include China in their global cash management operations,
sweeping surplus foreign currency funds offshore into international treasury
centres, netting certain payments, and minimising foreign exchange (FX) risks by
choosing which currency in which to manage cash flows.
have always been able to repatriate earnings in the form of dividends – a slow,
but reasonably straightforward process – the old rules tended to disadvantage
companies with strong cash flow but relatively small profits. Moreover, more
often than not the ability for companies to make dividend payments was limited
to once or twice a year, which may not have met the requirements of companies
needing the required funding. Tax considerations also needed to be taken into
Since the end of last year China-based subsidiaries of MNCs have
been allowed to make cross-border foreign currency loans to their parent
companies, but the programme has recently extended to renminbi (RMBs) loans. For
most entities, the RMB-loans are one-way from China to offshore, but the
regulators are currently piloting a programme for companies based in the Kunshan
area to allow Taiwanese parent companies to lend RMB funds to their onshore
For an extra degree of flexibility, the regulators have also
allowed companies to pledge surplus onshore funds to an international bank
against an offshore loan to the parent entity at preferential rates.
above also goes to complement previous regulations released in 2011 also
allowing MNCs to raise RMB funds offshore to inject capital into their onshore
operations, a solution that can reduce borrowing costs significantly compared to
an onshore loan.
Breaking New Ground
The recent changes come on top
of a series of pilot schemes the Chinese authorities introduced at the beginning
of the year, to simplify treasury management by facilitating sweeping and
netting of cross-border payments in foreign currency.
The next step is
likely to break new ground. Regulations in China might potentially allow
companies to pool their onshore RMB with their offshore regional pools via an
automated RMB sweeping mechanism. The ‘Holy Grail’ of many companies appears to
be now much closer in sight. The new treasury management options take place
against a backdrop of the growing usage of RMB as an international currency.
From a standing start just four years ago, RMB is now the world’s 11th most
popular trade settlement currency and is climbing fast. In the 12 months to July
2013 it tripled its share of global settlement, and HSBC predicts that by 2015
it will move into the top three, behind only the euro (EUR) and the US dollar
The gravitational pull of Asia as a treasury centre is increasing,
supported not just by deregulation in China but also by new clearing
architecture in countries such as Singapore and Australia which, has increased
speeds and lowered costs. They will soon be joined by the mainland, where the
PBOC is expected to introduce its China International Payments System (CIPS)
early next year.
Treasury management is on the front line of a broader
narrative of China’s increasingly seamless integration with the global economy.
Questions may remain over the exact pace and sequence of deregulation, but there
can be little doubt that reform will continue. Lao Tzu’s age-old observation is
today as relevant as ever: “The journey of a thousand miles begins with a single