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Global Treasury

Playing It SAFE with Chinese Cross-Border Transactions

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August 29, 2018

Knowing who’s who in Chinese regs and communicating with them effectively are key to smooth cross-border transactions

Chinese YuanMaking the most of a company’s channels for cross-border transactions with China is always a challenge. At a recent meeting of NeuGroup’s Tech20 Treasurers’ Peer Group, one China-based member updated peers on the best way to communicate with state regulators at the People’s Bank of China (PBOC) and China’s State Administration of Foreign Exchange (SAFE).

For one, this member said, be able to determine which regulator is which. The two major regulators are PBOC for cross-border fund flows in CNY and SAFE for USD. The ability to generate flows in both currencies will help companies work the branches and sub-branches along with the Beijing offices of these regulators. It therefore pays to understand which questions must go to Beijing and which don’t. And consider the interests of the local regulator and the impact on that city, both now and if your business needs change.

Also, determine whether they are they current account or capital account flows. Generally, cross-border fund flows and FX conversions are allowed where they affect the current account (e.g., trade in goods and services or dividends) – as long as you have real and legitimate transactions, the right documents, and follow the right procedures. Capital account transactions (e.g., foreign direct investment onshore, offshore investment or financing, overseas lending of debt or equity incentive-plan related) require specific regulatory approval.

To get a better handle of the funds and entities involved, map it out. Are they inside China or outside? In a free trade or special economic zone? If this diagram is smooth and consistent with how funds will flow through your business, your case with regulators is better. If it’s complex, and hard to justify vis-à-vis your Chinese business model, approval will be hard. A diversified business model will expand your options to move funds and get cash out.

Another suggestion: get other banks involved by pursuing a multibank strategy. Regulatory quotas on a bank or branch’s foreign transactions often determine their ability to move cash in and out of China. So, depending on quota usage, a bank may tell a client to wait a month to do a transaction to free up quota to do it. Local and global banks may receive a better interpretation of a regulation or quota at contrasting times, so pursue a multibank strategy.

Finally, participate in pilots is also key but be prepared. Pilot programs are opportunities to do what others cannot and influence how a regulation evolves. If you approach a regulator about a pilot, however, be prepared to do it—make sure HQ is backing participation. Regulators have KPIs, too, and one of them may be how many MNCs participate, bringing enough flows to generate pilot data.

Take advantage of informal guidance from regulators but recognize that it and verbal guidance carry both risk and opportunity. In some cases, ambiguity allows for innovative ideas to be tested on a limited basis whereas written confirmations may close opportunities. The trick to informal and verbal guidance is to have someone on your team who knows the local business environment well enough to interpret what has been said in the local context.

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