Corporates with operations in China are keen to bringing their trapped renminbi offshore so they can centralise their treasury functions. While the approval process for the cross-border renminbi loan has been relatively slow, the pace of it is likely to pickup in coming months given that there is a backlog of requests from companies.
The cross-border renminbi lending quota is part of a pilot programme that supports foreign and local MNCs which have plans to channel surplus renminbi capital in mainland China to fund their renminbi-denominated activities overseas - a form of intercompany lending.
Only a small handful of multinational corporations (MNCs) have been approved in the cross-border renminbi loan scheme in recent months, with the latest being Ford Motors. Also, J.P. Morgan – one of the newer banks to be part of the approval process – is also in the works of getting the People’s Bank of China (PBoC) to give the green light to one of its clients.
Just like any other capital account-related initiative, the Chinese central bank has been cautious about extending approvals and prefers to launch pilot schemes on a very gradual basis.
“China will take gradual steps, and that’s how you see new regulations in China implemented,” said Kee Joo Wong, China head of payments and cash management at HSBC, speaking to Asiamoney PLUS. “When you are piloting this with a particular set of clientele, maybe in a particular city, you can learn from that pilot and make certain adjustments before you roll it out on a full-fledged basis. This gradual approach works well and has helped ensure that regulatory changes, particularly complex ones, are carried out properly"
The scheme – which originally began in Shanghai in November – has been gradually expanding to other Chinese cities, including Beijing, Guangzhou and Shenzhen, according to sources.
While this is viewed as a positive development, there are no standardised guidelines about the how to navigate the approval process including what criteria companies need to meet. The procedure can also take weeks rather than months.
“It is pretty much a pilot scheme with a lot of discretion being used by the local PBoC offices to ensure that they have the right quality of corporates participating in the scheme,” said Michael Vrontamitis, head of product management east at Standard Chartered to Asiamoney PLUS. “You have to give [the regulator] all the financials, details about the pool participation in China, qualification of company subsidiary that is doing the lending, loan agreement, etc. It’s quite an extensive list and each location is slightly different.”
However, transaction bankers note that it is a learning process and will take time for policymakers to familiarise themselves with the processes. In due time, the approvals will be done in a speedier fashion and standardised guidelines will be established.
“We have several clients currently active under discussion with the PBoC. They are in various stages. Some has submitted the applications while some are in Q&A and review process,” said YiGen Pei, head of transaction services for China at Citi. “These companies are very eager to move certain set of cash from China to overseas so that they can centralise their surplus cash and liquidity in their global treasury operations.”
Very few of the corporates that are using the scheme have been named publically. Early adopters include Caterpillar, Danone, Emerson, Intel, Samsung, Schneider Electric, Shell and state-owned enterprises including Baosteel, China Oil & Foodstuffs, China Eastern Airlines, China Shipping, MinMetals, Shanghai Electric and Sinochem.
Local Chinese and foreign lenders such as Bank of China, China Construction Bank, Industrial Commercial Bank of China (ICBC), Citi, Standard Chartered and HSBC have helped steer their clients through the approval process, which is done on a case-by-case basis.
Anecdotal evidence suggests there is a backlog of corporates who are interested in being part of the pilot scheme. However, the approval process is tedious one and conducted on a very selective basis, which minimises their chances of getting approved.
“I think the rules have yet to be fully implemented by local governments in allowing companies to very easily float the money in and out of China and they are very selective,” said a chief financial officer (CFO) of a machine manufacturing company. “We will be thinking about it but we have not done anything about the cross-border renminbi loan yet.”
The CFO of Singapore-based medical device manufacturer Biosensors International, Ronnie Ede, believes there are better uses for the renminbi instead of plowing it back to the company’s regional headquarters.
One is via the practice of a corporate pledging its excess onshore renminbi and requesting its Mainland-based bank to issue a guarantee offshore. By using the guarantee as a form a collateral, the company will then approach another bank in the offshore market to get a loan facility, for example.
“It will generate a positive interest income because the interest rate on a US dollar loan is relatively low and the renminbi rate is still higher so you can actually make that structure work with a positive cash flow,” said, CFO of Biosensors to Asiamoney PLUS. “You may be able to make 0.5%-1% profit.”
However, transaction bankers highlight that this is not true and that a cross-border renminbi loan would be more beneficial given that the corporate will be able to reduce lending rate exposures, which have to be accounted for twice when dealing with both offshore and onshore financial institutions.
“In the cross-border renminbi loan arrangement you can eliminate the interest exposures with the banks because essentially it is just intra-group funding,” said Frankie Au, product management director for transaction banking at Standard Chartered. “By creating a ‘left pocket and right pocket’ structure, the interest that is paid by the offshore entity is actually paid to their onshore entity. The interest charge in this case is – from a group perspective – not a cost to them at all except there will be tax applicable on the loan interest.”