China: RMB Cash Pooling Business

Last Updated: 9 June 2016
Article by Connie Cai

The slowing down of the Chinese economy with a drop in the foreign exchange reserve has also affected cash pooling services for multinational corporations.

In the last issue of the Ecovis newsletter "info international" 1.2016 we contributed an article with news from China that RMB operations were being centralised. In the article we introduced the three available options for cash pooling business in the PRC which regulatory bodies in the last months of 2015 further facilitated. Among the methods introduced was the China-wide cross-border bilateral RMB capital pooling, the "free trade zone" renminbi capital pooling as well as the centralized operation of foreign exchange funds by multinational corporations.

However, towards the end of 2015 and in early 2016 the Chinese yuan lost ground as the Chinese economy reached its slowest pace of growth in 25 years. In mid-August 2015 the People's Bank of China (PBoC) weakened the RMB with the aim to move a fixing mechanism more towards a market driven mechanism. Yet in January 2016, China's exports fell by 3.2 percent year on year to 1.23 trillion yuan (200.78 billion US dollars). Imports were at 860 billion yuan, which is a decline of 19.7 percent. Overall foreign trade value fell to 9.8 percent year on year in January 2016. Then in February 2016 the monthly foreign trade surplus shrank by 43.3 percent year on year while the overall foreign trade value fell to 15.7 percent year on year to 1.43 trillion yuan.

Meanwhile the United States' Federal Reserve raised their interest rates in December 2015, the first increase in nearly a decade, while further economic projections signaled interest rate increases of up to four times in the US in 2016.

Combined with the drop of the foreign exchange reserve in China, all this fuelled concerns of a larger devaluation of the RMB already towards the end of 2015 and also in early 2016. Therefore on 18 January 2016 the PBoC in a meeting held with banks involved in cash pooling services for multinational corporations instructed them to limit outflows.

Under the stipulation handed out by PBoC, those banks qualified for RMB cash pooling services shall limit outflows in such a way that there should not be any net remittance outflow of capital. If it does not comply with the direction, the respective bank would be required to pay for the additional deposit reserve for 100% of the excessive amount. The bank furthermore may be prohibited from continuing cash pooling related services if not following the information.

The instructions issued on January 18 were conveyed only verbally, while no written policy has yet been published. Currently the doors for Chinese outbound investment and intercompany loans are still open.

The increase of control that we can observe is that authorities implement compliance-related regulations as well as controls as to the authenticity of intended transactions more seriously and strictly. While net remittance outflow of capital is prohibited, other transactions of RMB parts of normal business transactions of our clients are not affected.

Our suggestion and advice resulting from the development as introduced above and, from a certain anticipation as for the future of regulations on centralisation of RMB operations, is that adjusted or further expanded procedural requirements or restrictions in the future could be expected. A focus on the China-wide two-way cross-border RMB capital pooling version subsequently has no advantages in remitting money out of mainland China for our clients.

We would therefore like to call your attention to a direct comparison between that and the two-way cross-border RMB cash pooling available in various free trade zones across China. In our sample we take the Shanghai Free Trade Zone's (SFTZ) regulations to compare with "Document No 279" as introduced in the last newsletter.

The differences between Document No. 279 two-way cross-border RMB cash pooling and Shanghai Free Trade Zone cash pooling

No. 279 document in 2015

Shanghai Free Trade Zone

1. Threshold for member enterprises

Years operating

≥ 1 year

not mentioned

Total amount of operating income of Chinese domestic member enterprises in the preceding year

≥ RMB 1bn

The hosting enterprise shall be registered in the SFTZ.

Total amount of operating income of overseas member enterprises in the preceding year

≥ RMB 200 m

Member enterprises shall have an investment relationship.

Forbidden enterprises

Enterprises included in the list of special supervision (Key Regulatory List)

Enterprises engaged in a macro-economically controlled industry shall not be member enterprises.

Limitation of net inflow and outflow amounts (Cross-border bilateral renminbi capital pooling shall be subject to administration on maximum amount. Maximum net inflow amount of cross-border renminbi funds = accrued owner's equity of the capital pool * macro prudential policy index) Accrued owner's equity of the capital pool = Σ (Domestic member enterprises' equity * % of share held by multinational company)

No net outflow amount is allowed since Jan. 18, 2016.

Macro prudential policy index

0.5

no limitation

Relaxing the limit of capital resource

Limit of centralized cash flow

Funds are in line with the local regulatory requirements of member enterprises.

derived from the production and operation activities and from industrial investment activities

Usage of Funds

Overdraft

Daylight overdrafts and overnight overdrafts are allowed.

Daylight overdrafts and overnight overdrafts are allowed.

Bank deposit interest rates

applicable

applicable

Investments allowed and forbidden

Forbidden:

1. Funds shall not be invested in securities, financial derivatives and non-owner-occupied property.

2. Funds shall not be used to buy financial products and release entrusted loans for non-member enterprises.

Forbidden:

1. Funds shall not be invested in securities or financial derivatives.

Allowed:
1. Funds shall be used for corporate operating expenses.

Increasing the number of settlement banks

Number of settlement banks

Enterprise may select 1 or up to 3 banks.

Enterprise shall select 1 bank registered in Shanghai.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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