Almost every week, it seems there’s a press release about a landmark cross-border transaction in China facilitated by this or that bank. That’s because the country’s various finance-sector regulators are cranking up pilot programmes involving a select group of corporates and financial institutions. The objective: to gradually free up the currently restricted movement of the renminbi and foreign currencies on both the capital account and the current account.
“We are in the early stages, but I would say that all the steps are moving in the right direction,” says Kee Joo Wong, Head of Global Payments and Cash Management at HSBC Bank (China). “Hence, it is important for corporate clients to stay fully tuned in to what is going on in the China market to benefit from these developments.”
Wong spoke to CFO Innovation’s Cesar Bacani about the different pilot schemes that multinationals and other companies in China can consider becoming a part of, including those dealing with multi-currency payments, sweeping and netting. Excerpts:
There’s a lot of things happening in China with regard to cross-border currency movements.
When you look at the pilot programmes that are being run in China, both reforms on the foreign currency front and the RMB front have been progressing relatively quickly. These reforms are under the direction of the respective regulators in China; hence they are at different stages of implementation.
On the foreign currency front, we have seen reforms starting last year enabling corporate clients to have more flexibility on their capital and current-account transactions. These programmes are a natural extension of the financial liberalisation going on in China.
Things are changing on both the capital and current accounts?
When we say capital account we’re talking about mode of inflows of investments. Current-account transactions are more trade-related and service payments that flow in and out of China.
Previously a lot of these have been very much regulated by pretty onerous documentation requirements. And now a lot of these have been streamlined to allow companies to operate in a more efficient manner in China.
Take last year, for example. SAFE [State Administration of Foreign Exchange] rolled out a programme – this started as a pilot and then rolled out across China – that streamlined documentation requirements for cross-border foreign currency payments.
Previously, every company that makes a foreign-currency payment for trade in goods out of China would normally need to provide three sets of documents: the contract, invoice and customs declaration form. These were provided to the bank, and the bank has to make sure that these three documents match before they are able to send out the payment.
This obviously involves a lot of paperwork, a lot of onerous activities to get the documents match before the payment is made.
Since August last year, companies with a good compliance record now only have to provide any one of the three documents to the bank, hence, streamlining the entire payment process and, as a consequence, allowing greater efficiencies to be garnered when companies operate in China.
This has now been replicated and progressed even further on the RMB front. Customers who are making cross-border payments using RMB out of pilot sites in Shanghai, Beijing and some other major cities in China do not have to provide any documentation to support such payments. They need only register with approved [Simplified RMB Cross-Border Payment Pilot Scheme] banks such as HSBC.
What about cash sweeping and netting? These cash management solutions are standard in Hong Kong and Singapore, but not in China.
We have witnessed even greater levels of flexibility and innovation being implemented in China with the rollout of pilot schemes such as the foreign-currency cross-border sweeping and netting schemes in Shanghai and Beijing.
Moreover, in December of 2012, new regulations were introduced by SAFE to enable investments into China – opening up of capital accounts, FX conversions, and FCY cross- border loans (onshore to offshore) – easier to execute.
These clearly reflect the speed and pace at which reforms in the financial sector are opening up. The environment in China, from a financial sector perspective, is progressing forward to be in line with international financial centres like Hong Kong and Singapore.
There’s still a way to go and we are in the early stages, but I would say that all the steps are moving in the right direction. Hence, it is important for corporate clients to stay fully tuned in to what is going on in the China market to benefit from these developments.
Tell us about this new pilot involving HSBC and a Korean multinational in China. Why do you describe this as a ‘landmark’?
The pilot involving the Korean multinational in Beijing is basically a cross border netting solution that allows the Korean multinational to reduce the number of inter-company cross-border payable and receivable transactions via a monthly net-off. In the process, this brings greater operational efficiencies and cost savings, and allows them to optimise their working capital.
This is certainly a landmark transaction as this has never been allowed and carried out before in China, as is the cross-border pooling solution that we worked with another international client to implement in Shanghai.
CFOs have long complained of having ‘trapped cash’ within China because of the currency controls there.
It depends on your definition of what trapped is. If you want to take money out of China, you can do it simply by dividend repatriation. It’s just that there are taxes that you have to pay.
But the new cross-border automated sweeping pilot will allow for easier utilisation of onshore funds in China to be swept into an offshore regional pool; hence allowing for excess cash in China to be used in the most cost effective and optimal manner – offshore.
The cross-border pooling and netting pilots mean that whatever foreign exchange you have within China can now be swept together with foreign currencies you have outside of China?
Let me first make clear that the pilot programmes are geared towards foreign currencies (not RMB), and driven separately from other pilot programmes on the RMB front.
Most companies on the pilot programmes would normally start off with one currency to ensure simplicity in implementation, and probably move towards a multicurrency pool at the later stages.
It is also important to understand that this cash pooling is bilateral, meaning that you can transfer out, but you can also transfer in.
Companies investing into China, if they were to have this cash pooling application, would also [have] an easier ability to invest into China. New rules in relation to this pilot programme allow companies to have a combined borrowing limit at the pool header for all their legal entities in China.
Regarding the bilateral sweep, it is really about sweeping onshore cash offshore plus having the ability to sweep offshore cash onshore. This is something that’s very important because a lot of people have just focused on the fact that they think it’s an avenue to sweep cash out of China. That’s not the intention. It’s really an automated bilateral sweep. It’s not just one way.
This programme is also open to SOEs. For example, state-owned enterprises investing overseas will have accumulated cash overseas. They would be in the converse position, meaning that they would have the ability to set up a pool that would pull in overseas cash into China.
Can companies in China convert their RMB earnings into US dollars onshore, and then put the money into the regional pool and in effect sweep it offshore?
If you have RMB and you want to convert it into dollars, there should be underlying supporting documents. You just can’t convert without any reason. That would create a lot of speculative pressure.
If you’re exporting from China and you are invoicing in US dollars, you will have dollar receivables in China. Through time, this will accumulate into what we call an excess position, such that when you’re doing your sweeping, you’ll be using the excess cash that you have to facilitate usage overseas.
The one that we did for the Korean MNC is foreign currency netting, which was not permitted in China before. Basically you’re netting off your inter-company payables and receivables. For example, on a monthly basis, Company A overseas owes another company entity in China x amount. They would be making a hundred payments, but at the same the company in China then owes the company overseas x amount.
So what we’re doing [as a bank] is we’re netting off the total payables and receivables, to come up with a net amount, and then we make a singular payment. It’s between two entities [in the same group]; the bank facilitates the transaction.
It saves a lot on the operational work plus you have savings, given that you’re making only one payment. You get FX savings too.
How could a company and a bank qualify to participate in a pilot programme?
There’s a framework in terms of different kinds of solutions that would be potentially utilised. Given that it’s in the pilot phase, approvals will be given on a case-to-case basis to facilitate these transactions.
Companies are selected [by SAFE] and they work together with banks to get [the solution] implemented. There is a process where we go through discussions in terms of what components within that framework a company will want to pursue, how the company’s particular operational structure [will affect the implementation], how would they want to do the processing . . . and then we would go to joint approvals as to how this will be done.
SAFE had actually identified which companies and which banks will be involved?
There is a selection process by the regulators. They look at the company’s reputation in the market, compliance with regulations, size . . .
If you’re not within their selection process, you can try to apply. However, it is important to work with banks that have the necessary experience to facilitate the submission to the regulators, as this would certainly help in getting the necessary approvals.
Do we know how many have been selected so far?
For the corporations, there are circa 13 companies.
I believe that other banks are working on it, but as far as I’m aware HSBC is the first foreign bank to receive [pilot approval] for these two landmark structures in China. The first cross- border sweeping programme [that HSBC is piloting in Shanghai] has gone live.
How is the implementation coming along?
There have not been any problems. We’ve been working very much hand in hand, actually tripartite, in terms of ourselves, the company together with the regulators to ensure a smooth and safe implementation.
Do we know how much the quota is for companies joining this pilot programme?
The quota is very much dependent upon the criteria that are put out by the regulators. Without going into specifics, this is capped by the respective companies’ lending and foreign debt quotas. Obviously the regulators would want to make this a success, so they would be introducing quotas that make sense.
What about the technologies and processes that would enable companies, through their banks, to do sweeping and netting?
Basically they would have their own ERP and treasury management systems and processes; at the same time we as a bank have a very robust liquidity platform which is very standardised across the globe.
In terms of being able to provide scalable platforms to assist the companies when they’re doing their liquidity management via these cross-border sweeps, it’s very much a platform that the banks provide. The company itself does not necessarily need to have a platform to do the sweeping because the underlying technology and the way that money gets transferred, those are all provided by the bank.
What’s happening on the renminbi front in China?
They’ve already started the process of allowing the RMB cross-border lending. Unfortunately, people think of this as a cross-border foreign currency lending, but it is actually RMB cross-border sweeping. There’s been a lot of misrepresentation.
So cross-border RMB sweeping and RMB netting are off the table in China still?
No, it’s actually something that we are currently working on. The progress made on the foreign currency front on new and innovative solutions should provide a sense of what should eventually be possible on the RMB front too.
There’s a saying in China that you cross the river by feeling the stones. If you look at this context of crossing the river by feeling the stones, you understand why they run pilot programmes, which are basically to allow the regulators to fine-tune for what works in China.
When will we see the RMB sweeping and netting programmes getting implemented?
I would foresee that there would be progress this year. If you look at the speed that the financial sector has liberalised, that gives you an indication of the speed many of these programmes could potentially happen.
The early steps have already taken place. Under the Simplified RMB Cross-Border Payment Pilot Scheme, companies that have fulfilled certain qualifications and are endorsed by the banks, when they make RMB payments out of China, there is now no need to provide documentation.
So you can see, on the foreign currency side, we started from three documents to one, then the sweeping and on to netting. If you look at the RMB side, we started also in terms of simplified payments.
For all trade or service related payments out of China, in most cities, if you’re a qualified company and have applied to the banks which have been given the approval by PBOC [People’s Bank of China], you will have the ability to make the payments out using the RMB without the need for documentation.
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