Harnessing the Value of Cash in China

The term “trapped cash” is frequently used to describe liquidity that is difficult to mobilise or repatriate - a challenge in many markets in Asia where capital and/or currency controls exist. China is one key market where this is particularly challenging.  Given the scale and importance of China to many companies, unlocking ‘trapped’ cash in China is often a priority. Treasurers need to consider how best to access available cash, and therefore what permitted cross-border liquidity and trade settlement techniques are most appropriate for them to minimise the friction involved in mobilising cash in and out of China.


A winding liberalisation path 

China is attempting something quite new by transitioning from a state-controlled economy of its scale and international significance to an open market economy, and is keen to make this transition in a controlled way. Since 2009 when RMB cross-border trade settlement was first permitted, China has come a long way in reforming its financial markets and regulations, including the relaxation of controls on cross-border financial flows, even though it will take more time to become fully liberalised. For example, while the government has created channels to move cash in and out of China, companies need to make sure that the purpose for which these funds will be used, and overall scale of fund movements are aligned with local regulations. 

The liberalisation journey is not a linear one, with pauses and reflections along the way. Consequently, treasurers have experienced periods when cross-border flows are encouraged as part of the RMB internationalisation process, and periods when those flows are more tightly controlled to stabilise the market. Furthermore, given the enormous diversity across China, companies operating in China may encounter complexities in decision-making. Hence, having a banking partner will help in clarifying the local adoption of new rules in cities and provinces where they operate. 

Applying liquidity solutions to client needs 

Given the complexity and potential uncertainty when managing cross-border liquidity, in particular moving funds held in China offshore, it is important for companies to keep abreast of regulatory updates and seek expert advice from banking partners such as DBS that work closely with the local regulators.  

Many larger multinational corporations with well-established treasury functions are experienced and aware of their options for cross-border liquidity, but companies with less experience in managing liquidity cross-border, often rely more heavily on bank expertise. 

What quickly becomes clear when assessing different cross-border liquidity options is that there is no single solution that can fit every organisation. Instead, it is essential to understand the specific needs of the company and to ascertain, for example: 

  • What currency is ‘trapped,’ and in which city in China? 
  • How much is required to be transferred into/ out of China, and what is the relative scale of this in proportion to the size of the company? 
  • What will the funds be used for? – e.g. to fund working capital, pay down debt, pay dividends or fund investment in the business? 
  • For how long will the funds be required overseas before being repaid back to China? 

Depending on the answers to these questions, and the company’s business strategy in China and overseas, cross-border pooling, cross-border lending or various foreign debt schemes in either RMB or foreign currencies may be appropriate. 

Treasurers also need to consider the tax implications, such as withholding tax and value added tax.  In China, tax isalso one of the key considerations when a company selects its optimal liquidity management structure and mechanism. For example, domestic sweeping mechanisms in China include zero/target balance, tax-efficient, horizontal, on-demand and multi-layer ones, while cross-border sweeping mechanisms include automatic and on-demand ones. Each sweeping mechanism has its own tax implications. 

Leveraging the FTZ advantage 

“Most frequently, we work with companies to introduce, or expand on, a free trade zone (FTZ) version of cross-border pooling. FTZ cross-border pooling offers the merits of a simpler implementation process, less onerous documentation requirements and more flexible cross-border fund movements, all of which reduces friction in treasury operations.” 

Vincent Hua, Head of Sales for Asian Corporates, Global Transaction Services, DBS China 

However, under a FTZ cross-border pooling arrangement, the use of outgoing funds from China is restricted to working capital, and relatively frequent cross-border flows resulting from the company’s regional liquidity management activities are expected to happen within the pool. For companies that need cash overseas for a longer term, a cross-border lending solution may be more appropriate, as the maturity period can be up to 5 years. 

“In some cases, clients are not seeking to transfer funds from China, but instead, seeking to harness the value of financial assets in China more effectively as part of a regional or global strategy. For example, DBS offers a cross-border guarantee structure where funds deposited in China can be used to support an overseas loan, such as for capital investments, a usage not allowed by cross-border cash pool.”  

Vincent Hua, Head of Sales for Asian Corporates, Global Transaction Services, DBS China 

The value of partnerships 

Looking ahead, the liberalisation journey will continue to evolve, which is likely to create new opportunities and greater freedom in the cross-border movement of intercompany liquidity. Furthermore, as the number of companies in China seeking expansion overseas increases, and foreign multinationals build their operations in China, the demand for cross-border liquidity solutions is likely to grow. 

“Just as we have seen in the last few years, the pathway is unlikely to be a straight one, and liberalisation is unlikely to take place at a single speed. Consequently, treasurers should be planning their liquidity strategies based on tools available today as opposed to planning around an uncertain future.” 

Mark Troutman, Global Head of Sales, Global Transaction Services, DBS 

Regulators are working closely with leading banks in China such as DBS to collaborate on future opportunities. It is therefore important for companies of all sizes to work with a banking partner  with proven expertise, solutions and relationships to help identify, harness and derive value from cross-border liquidity solutions. 

The information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. 

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