The People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (Safe) have permitted the transfers of both the renminbi and foreign currencies out of the mainland, leading to a risk of only one-way flows as multinational corporations (MNCs) seek to remove many years’ worth of trapped cash from the nation.
A Korean MNC was recently allowed to implement a foreign currency netting solution for the trade of goods in China, according to a press release from HSBC on January 14. The pilot foreign currency, cross-border netting solution enables MNCs to offset their foreign currency payables and receivables between their Chinese subsidiaries and their netting centres located overseas.
Under this scheme, companies will benefit from a substantially reduced number of intercompany transactions, lower processing costs and lower currency risk exposure, say market participants.
“In the past restrictions to cross-border flows have meant that integration of cash positions in China into a regional or global treasury management structure have been difficult,” saidPaul Campbell, head of international liquidity and investments product management at Royal Bank of Scotland (RBS) in a telephone interview to Asiamoney PLUS on January 16. “This pilot programme allows clients to look at integrating China flows into their international operations.”
Kee Joo Wong, head of payments and cash management in China at HSBC agrees: “We have worked very closely with our client in China to design a netting solution which will enable them to consolidate their foreign currency transactions, reduce foreign currency exposure, lower processing costs and improve operational efficiency.”
This new netting solution is an integral part of Safe’s recently launched foreign currency centralised management pilot scheme for MNCs, which allows foreign companies and state-owned enterprises (SOEs) to establish an automated, cross-border, sweeping structure for foreign currency in China.
In addition to the centralisation of collection and payment, and the netting of these items, foreign corporates can also automate cross-border cash concentration and intercompany lending transactions, highlight experts.
While these are all considered positive developments, there are risks involved. China risks seeing the outflow of foreign currency-denominated funds – also known as trapped cash – that MNCs have accumulated over the last few years from its market.
“The risk is that it’s more a one-sided flow instead of it being a two-way flow. You would want to see two-way flows over a period of time so that there’s confidence in putting pool-headers in China as opposed to putting pool-headers outside of China,” said Michael Vrontamitis, head of product management east for transaction banking at Standard Chartered (StanChart). “In doing so, clients can expect access to different payment and liquidity structures to free up working capital.”
Pool headers are the lead account in a cross-border or pooling structure.
The other risk is that the quota system is not carefully adhered to, but transaction banking experts believe that this is not a major issue as Chinese regulators will constantly check against these quotas. Chinese authorities tend to test waters by launching these pilot programmes on a small-scale basis for the first couple of months, suggesting that a large outflow of funds from China is not possible.
For example, the scheme is only launched to a small group of select Chinese and foreign invested MNCs and banks in Shanghai and Beijing.
“That is why they [Chinese regulators] are doing a pilot first – only a handful of MNCs are allowed to participate initially, so this is not going to have a major impact in the overall balance of payments,” saidCarl Wegner, Greater China head of global transaction banking at Deutsche Bank to Asiamoney PLUS on January 16. “While the pilot enables these MNCs to make better use of their liquidity between their onshore and offshore subsidiaries, as financial markets and products grow in China, more MNCs will have more incentive to bring money back into China.”
Chinese regulators are also very selective toward the types of corporates that are allowed to be part of these pilot programmes. These companies are likely to be established Fortune 500 names with relatively large presence in the mainland, highlight experts.
"This scheme suggests an increased level of trust and belief from regulators that these companies are genuinely conducting and doing business, and that they’re not speculating on the currency," said StanChart’s Vrontamitis.
In the past, MNCs had to deal with cross-border transactions manually on a gross invoice-by-invoice basis although some individual corporates – especially the larger ones – were able obtain special exceptions that enabled them to manage their cash more effectively.
As a result, the recent launch of the foreign currency sweeping by MNCs aims to standardise these procedures and set clearer rules.
“In the past, corporates may have had ten different treasury entities in China, with ten different treasurers to manage them all. Now, they can manage their business with only one treasury centre for China. This alone is a significant benefit for MNCs,” said Wegner.
In November, the People’s Bank of China (PBoC) launched a pilot programme that supports foreign and local MNCs which have plans to channel surplus renminbi capital in the mainland China to fund their renminbi-denominated activities overseas.