Capital controls in Asia are a chronic problem for MNC’s. What’s worse, these constraints often are compounded by inconsistency in interpretation and enforcement – and can change without warning. They also can surface without warning, as they did recently in Malaysia, or they can be around for years in various forms, as is the case with China. In recent roundtable session at the NeuGroup’s Asia Treasurers’ Peer Group (ATLG) members exchanged tips on how they are coping with recent regulatory changes in capital controls across Asia, and how these changes are impacting their business.
It’s seemingly a rollercoaster ride in China, with the regulatory environment going from stability to instability and then to gradual improvement. For several years, China’s rules for capital inflows and outflows were increasingly relaxed and companies became more comfortable doing business there (see related story here). They also go comfy getting cash out of the country.
More recently, however, the China began to panic as capital flight increased among both foreign entities and locals. The financial regulators responded by restricting the previously heralded cross-border pooling structures. One member noted that “regulators started calling you up and telling you what to do instead of publishing new rules.” This company was told to forecast import volumes over three months and to plan for USD needs with no tolerance for variance. Another member reported being “invited” to Beijing, along with other companies, to “give a report on plans for trade flows, intercompany (IC) transfers, et cetera.” The purpose was purported to be “for the good of the national interest.”
China’s State Administration of Foreign Exchange or SAFE, is apparently fine with USD cross-border loans out of the country, but RMB loans are no longer allowed for now. However, banks can convert RMB to USD and then dividend the money out. Some members doing cross-border loans report being told to do them in multiple tranches.
Dealing with regulators directly vs. through relationship banks also presents a challenge. There are two views about which approach is best. Some members reported having very good relationships with the People’s Bank of China and SAFE and routinely interact with them directly. One member stated that the company’s legal department prefers treasury deal directly with regulators. However, another said he views regulators as he does his in-laws: It is best to go through the wife; i.e. the banks. For very high-level issues, he will go directly to the regulators but even then, only says he will go back and get input.
Another member said that if your bank has a good relationship with the regulator, that approach will probably work fine. But he also cited another company that works closely with regulators to understand the rationale for certain rules and then tries to get exceptions via formal requests and efforts to receive a formal response.
Capital controls are a fact of life for MNC treasury departments. They may ebb and flow in their intensity, but will be around for the foreseeable future. Consequently, treasury departments have no choice but to find the best sources of support, including banks, legal teams, and tax teams. And, if appropriate, building strong relationships with the regulatory bodies. Treasury will also have to continue to be knowledgeable and articulate enough to educate HQ on these ever-evolving regulations and the limitations on cash movement and accessibility that they present.