On October 12, 2009, the State Administration of Foreign
Exchange ("SAFE") issued the Administrative Rules on
Foreign Exchange Cash Pooling of Group Members of Enterprises in
China, Hui Fa  No. 49 (the "Rules"). The Rules
provide guidelines for the establishment and operations of cash
pooling in foreign exchange for enterprises and their affiliated
members within China. The Rules came into effect on November 1,
Eligible Participating Members
The Rules regulate only cash pooling in foreign exchange among
enterprises or other organizations within China and do not apply to
cross-border cash pooling. Members that can participate in cash
pooling of a group include (1) the parent company, (2) a subsidiary
of which the parent owns 51 percent or more, (3) a company of which
the parent and subsidiaries separately or jointly own no less than
20 percent, (4) a company that does not satisfy the 20 percent
ownership requirement, but the parent or subsidiary or both jointly
are the largest shareholder of the company, and (5) nonbusiness
organizations under the parent or subsidiary. For foreign invested
enterprises, Chinese companies that are controlled by the same
foreign enterprise can also participate in a cash pooling for those
Setting Up Cash Pooling
Enterprises other than financial institutions normally cannot
operate lending businesses because of the limitation of their
business scope. A foreign exchange cash pooling is operated under
an entrusted loan framework. A bank that is licensed to conduct a
foreign exchange business will serve as the nominal lender
(i.e., the bank makes a loan to a borrowing member on
behalf of the lending member). The enterprises determine the
interest rate and other loan terms; the bank does not assume any
credit risk and charges only a service fee. The principal
enterprise setting up a cash pooling should select an authorized
bank, and the participating members/lenders should open special
foreign exchange accounts at the bank. The bank should apply for
the establishment of foreign exchange cash pooling with the SAFE
branch at the location of the bank, which should make a
determination on the application within 20 working days.
As an alternative to an entrusted loan arrangement, foreign
exchange cash pooling can be implemented through a finance company
of the enterprise group within China. In such situations, the
finance company receives foreign exchange deposits from cash
surplus members and makes foreign exchange loans to the members
that need cash. As those activities are the normal business of a
finance company, the approval of SAFE is not required.
Restrictions on Interest Rates and Currency Conversion
The Rules require that interest charged in cash pooling should
be determined in reference to interest rates on commercial loans
for the same term on the international market. The interest rate
cannot be abnormally high or low. One of the restrictions on
foreign exchange cash pooling provided by the Rules is the
conversion of foreign currency into Chinese currency, Renminbi. If
a cash pooling is operated in an entrusted loan arrangement, a
borrowing member is not permitted to purchase Renminbi using the
foreign currency obtained from the cash pooling or pledge the
foreign exchange for a Renminbi loan. If the conversion into
Renminbi is needed, the foreign exchange fund must be returned to
the lending member, and the lending member can convert the foreign
exchange into Renminbi according to applicable foreign exchange
If a foreign exchange cash pooling is operated through a group
finance company, the finance company is allowed to convert foreign
exchange into Renminbi for participating members. However, the
finance company must satisfy certain requirements to conduct such
business. Furthermore, the conversion must be approved by the SAFE
branch at the location of the finance company.
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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