A series of meetings in China suggest bolder action by MNCs to improve cash management through pilot programs.
The ability to implement liquidity management solutions to ease moving cash in and out of China continues to improve—even if not at the pace and with the consensus certainty that everyone would like. That’s one of the major takeaways from conversations The NeuGroup had in China last week with bankers, Asia region CFOs and an official from SAFE (State Administration of Foreign Exchange, China’s FX overseer), all of whom participated in our latest peer group launch.
For one of the newest cash management solutions, e.g., China offering two-way sweeps of cash cross-border, MNCs will need to have an entity in the Shanghai Free Trade Zone (SFTZ); they will also need to be bolder in asking for what they want when working with Chinese regulatory authorities. An entity in the SFTZ can have a header account onshore in the zone that is mirrored with an account offshore. A year in, this has proven to be the main benefit of having an entity there, despite broader expectations.
BNP Paribas, for example, which presented on the structure at The NeuGroup’s ACFO meeting, will arrange to link up a domestic RMB pool with the SFTZ entity as a conduit to your off-shore cash pool. Cash can move freely, through the conduit, so long as the net position of the offshore pool is cash positive and this positive position can be shown to come from operating cash flows.
Two-way sweeping eliminates much of the hassle of the alternative cross-border flow arrangement, whereby the RMB funds sent offshore have to be characterized as a loan, requiring selection of tenor, pricing and loan administration and documentation—not to mention the idea that funds eventually have to be brought back into China to settle the loan. The new arrangement will make it easier for MNCs with cash needs in China (e.g., pharma firms) to access excess cash outside China for working capital and those cash-rich in China (e.g., tech firms) to see China contribute to usable cash balances, albeit still “trapped” off-shore for US MNCs.
The link between the SFTZ, a locally-administered pilot, and greater treasury flexibility in China is important.
Competing local authorities
It is not necessarily true that all authority rests with Beijing. Increasingly, reforms are being set forth in principle by Beijing, but subject to interpretation and implementation by local authorities. Thus, what MNCs are able to do in practice may depend to a significant extent on how local authorities choose to interpret the rules. What is doable in Shanghai or other commercially-minded, mostly coastal region cities like Shenzen or Guangzhou will be different than interior cities link Chonqing or Chengdu, though the latter is catching up fast.
China, and more importantly, local authorities in Shanghai, have an incentive to make the SFTZ two-way sweeping structure work, as otherwise there is no big advantage (outside trading-oriented firms that want the customs benefits) for MNCs to participate actively in the pilot. For this reason, it might also slow the pace for roll-out of two-way sweeping nationally. Some banks are hoping for a national rollout later this year or next. A more likely scenario, if it succeeds in Shanghai, is that other local authorities will look to offer something similar in their special economic zones (Tianjin and Guangzhou would likely be next). If two-way sweeping is the major incentive to establish entities in these zones, then a national rollout would ruin their chances.
Still, so long as the tone at the top is promoting cautiously paced liberalization, these competing interests are more likely to help bring about interpretations of rules that allow MNCs greater flexibility, provided they are in good standing with these authorities at all levels. In addition to municipal authorities, the provincial-level authorities will also come into play. Similarly, tax authorities, which are much more granular jurisdictions, factor in, as they will assess the impact on their revenues. Thus, on the negative side, if a level of authority is not in sync with what western firms want to achieve, or they have a stake in Chinese entities looking to compete with them, local interpretation may stand in an MNC’s way.
Overcoming pilot fatigue
Negotiating the local angles is not the only frustration with doing business in China. Given that pilot programs like the SFTZ are the preferred means for Chinese authorities to introduce reforms and test their impact, MNCs active in China are suffering from pilot fatigue. This pilot fatigue is most acute when MNCs do the heavy lifting to help Chinese authorities understand the mechanics of reforms that they seek to have implemented to support direct investment during the pilot program, only to see rules allowing them for broader market participants some months to a year later.
To counter pilot fatigue, MNCs that participate in pilot programs should be bold and ask to implement exactly what they feel they need as part of the program. This advice comes from Mu ZhiQian, a SAFE official and president of its China Forex Magazine: “SAFE will encourage first-movers and allow them to benefit from preferred policy scope and give them more headroom to do what they want to do.”
Chinese authorities appreciate the work that MNCs do with pilots, according to Mr. Mu, and will look to reward them more. Thus, MNCs should not be afraid to ask for what they really want—just be prepared to justify the need and explain how it should work in detail. Appreciation for the time spent and knowledge exchanged should lead to more than brownie points, namely, greater flexibility and longer windows of opportunity to enjoy pilot-exclusive benefits.