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Sending More Cash Out of China Using Pools in Free Trade Zones

By November 3, 2022No Comments

Unpacking a member’s cash pool in China in a free trade zone where window guidance put no limit on cash outflows.

Many NeuGroup member companies face a challenge getting cash out of China—in part because of rules limiting outflows from cash pools set up under a so-called nationwide scheme to 50% of the net equity held by a company’s entities in the country. But not all multinationals have this problem.

  • At a recent session of NeuGroup for Global Cash and Banking, one member intrigued peers by describing how his company is taking advantage of free trade zones (FTZs) established in China that do not have specified limits on outflows, where corporates rely on unpublished “window” guidance provided by regulators.
  • That prompted the member’s company to set up a special cross-border, physical RMB pool, based in Shanghai, which sends cash via intercompany loans to a multicurrency notional pool based in Singapore, which is pooled under a dollar header account and sent to the US.
  • “China is a big entity for us, with trapped cash,” the member said. “We’d been studying this for the past year.”
  • One of the members who was unaware that companies could send more than 50% of equity out of China said he would immediately contact his team to look into following suit.

How it works. To benefit from the relaxed outflow rules governing free trade zones (FTZ), the member company set up a cross-border cash pool made up of three accounts (see graphic below):

  1. A pool header operating account, onshore in China, which consolidates cash from all the corporate’s RMB subaccounts in the country.
  2. A special cross-border account in the Shanghai FTZ that sweeps domestic cash and retrieves overseas cash. This requires an application and approval from the People’s Bank of China (PBOC), which the member said can take one to two months.
  3. An offshore header account in Singapore that receives the cash, sent in CNY and received in CNH.

Another corporate’s liquidity director told NeuGroup Insights his company has a similar, special pooling account, also based in Shanghai. “Under the terms of this pooling structure, we can move unlimited amounts of cash, the only major requirement being that at least one time per year we have to have a zero balance for the sweep—meaning we have to repay all of the funds sent out of country for one day,” he explained.

A true team effort. The US-based member who described the structure at the meeting said setting it up was relatively complex as it required government approval and a very hands-on team in Asia, starting with a regional treasurer in Singapore.

  • He said the Singapore team obtained approval from the PBOC and worked with a local bank to set up the accounts. “We’re stepping in now to coordinate from the US side to make sure that we provide liquidity, interest rates, deposits, and make sure we’re fully covered,” he said.
  • The regional treasurer said that because China is “very paper-based,” she depended on a China-based treasury manager to propose banks for corporate approval, set up the facility’s infrastructure and get approval from regulators. The treasury manager followed guidance from the PBOC and the State Administration of Foreign Exchange.
  • “He is the one who is running around, talking to banks, talking to peers—this takes time and expertise,” the regional treasurer said. “If you do not have suitable people in country, it’s not easy; you wouldn’t be able to do it if you’re sitting in Singapore.”

Why not do it? Some multinationals that use the nationwide pooling scheme and have not opted to take advantage of the increased flexibility offered in China’s FTZs simply don’t have operations in the special regions necessary to set up a pool header account.

  • “The free trade zones are not everywhere,” one member said. “So if your company is in Shenzhou, you cannot do the free trade zone version. The FTZ is intended to attract people to concentrate imports into certain areas.”
  • They said in addition to having a FTZ designation, an eligible corporate considering the special pooling structure should have multiple entities in China. A corporate with only one account in the country may use repatriation via a dividend to move cash out of the country.
  • A NeuGroup member at a company using the nationwide structure told NeuGroup Insights: “We are aware of the other schemes, and continue to evaluate.  We have had a positive partnership with regulators in developing and operating our existing structure and it has largely met our needs. We also believe this nationwide scheme offers the greatest stability and predictability, which is important to us both locally and globally as we manage liquidity.”

Words to the wise. Indeed, the regional treasurer warned corporates weighing the benefits of pools in an FTZ to be wary of ever-changing window guidance from the PBOC.

  • “I want to put a disclaimer that this was a chance for us to take advantage of China opening up because of how the economics have evolved,” she said. “But there is a chance that, even tomorrow, they could change the regulation—and they don’t have to give advance notice.”
  • And don’t expect to get parameters documented in writing. For guidance on FTZ RMB pool outflows, “even the bank won’t write an email to you, they’ll only tell you over the phone,” the team member in Shanghai said.
Justin Jones

Author Justin Jones

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