The next phase of renminbi liberalisation will allow corporates in China to automatically sweep surplus amounts of the Chinese currency in and out of the country. Transaction bankers say talks are underway with the government to introduce two-way sweeping that would boost treasury processes between the world’s second largest economy and other markets.
China’s existing capital account controls makes it difficult for transaction bankers to implement two-way sweeping renminbi capabilities for their corporate clients, but some sources note that this could already be in the works.
“With the one-way cross-border renminbi lending, this opens up opportunities for corporates to include China as part of their global or regional treasury liquidity management and encourage further growth of offshore renminbi liquidity,” said Frankie Au, head of renminbi products, Asia, transaction banking at Standard Chartered to Asiamoney PLUS on August 22. “We expect the relaxation to be taken gradually, step-by-step, and would not be surprised if [the two-way sweep] is being considered by the Chinese regulators.”
A ‘sweeping’ mechanism allows a corporate set up a bank account – known as the ‘sweep’ account – that automatically transfer amounts of cash that exceed (or fall short of) a certain level into higher interest earning investment option at the close of each business day. Commonly, the excess is swept into money market funds.
“Corporates may set an overall quota – how much can be moved in and out,” said Carl Wegner, head of global transaction banking, China at Deutsche Bank. “For example, each quarter they may have excess or not enough cash within that quota, but with a sweep account, they are able to square it at the end of the day.”
“Potentially, corporates that have enough cash to pay their bills can then sweep the excess into an account that has the best overnight interest rate,” he added.
At the moment, a growing number of corporates are allowed to channel surplus renminbi capital in the mainland China to fund their renminbi-denominated activities overseas via a pilot programme that was launched last November. But as of yet the scheme does not allow the currency to move the other way.
Early adopters of the cross-border renminbi intercompany lending scheme include Caterpillar, Danone, Emerson, Intel, Samsung, Schneider Electric, Shell and state-owned enterprises such as Baosteel, China Oil & Foodstuffs, China Eastern Airlines, China Shipping, Minmetals, Shanghai Electric and Sinochem.
As a result, these corporates would also be good candidates to join the two-way renminbi auto-sweep pilot scheme, say transaction bankers.
“Any of the big names that have done the last couple of pilot schemes would be likely candidates,” said a Shanghai-based transaction banker to Asiamoney PLUS. “Other than these, it’ll probably be the corporates that are invoicing in the renminbi and have two-way flows in the currency. Also, those that have some regional treasury centre, whether it is in Europe or Asia allows them to leverage the pilot scheme a little better.”
Capital account controls
On the foreign currency front, policymakers have relaxed their controls. In fact, in December Intel was the first global company approved to establish an automated cross-border, sweeping structure for its foreign currencies trapped in China.
The pilot scheme, which aims to centralise foreign currency management for multinational companies (MNCs), will ultimately enable businesses to manage their cash more efficiently by connecting their onshore and offshore cash management structures.
However, Chinese regulators are a little behind in terms of allowing the renminbi to freely flow in and out of the country, and for good reasons too, note bankers.
“Anytime a country liberalises, it’s a gradual process,” said Wegner. “If they open up things more, it makes people more willing to invest in China – which is their goal – but at the same time, the money could leave the country just as quickly.”
Also, a recent circular released by the People’s Bank of China (PBoC) addresses and simplifies trade transactions that are executed in the Chinese currency.
For example, for renminbi cross-border transactions under the current account, banks can process funds that need to be booked and verify the trade documents later. This exercise is part of China’s ‘Simplified Documentation Checking’ pilot initiative, which was announced in July 2012 and has been expanded nationwide in July this year.
These simplifications could help lay the groundwork for similar relaxations to be implemented for capital account movements. This is because the two-way renminbi sweeping pilot scheme is only feasible when no manual approvals are needed.
Alternatively, transaction bankers note that the PBoC will most likely install a cap on renminbi sweeping in order to control the amount of money the corporate is allowed to bring in or out.
This potentially new initiative coincides with China’s hopes of establishing Shanghai as a free trade zone, enabling the city to explore investment and trade policy innovations and expand the services industry, according to HSBC in a report on July 4. Trials that involve financial reforms include interest rate liberalisation and full convertibility of the renminbi.