Chinese regulators reinstate accommodative cross border payments regulations
(26 March 2019 - China) China’s foreign exchange (FX) regulator, the State Administration of Foreign Exchange (SAFE), has committed to make it easier for global corporates to implement cross-border liquidity and payment structures following a two-year suspension.
Banks and corporates can proceed with structuring cross-border cash pools denominated in either Chinese Renminbi or other currencies in addition to other netting schemes.
“This is exciting news for corporate treasurers at multinational companies with operations in China. Almost two years after a suspension, an application window has been reopened. Now is a very good time for corporate treasurers to raise their hands and submit applications for cross-border sweeping arrangements. Previously, companies that wanted to move funds out of China would have seen it booked as an intercompany loan but with this scheme, an automated cross-border liquidity structure similar to what they find elsewhere can be created” said Yi Xiong, Deutsche Bank’s head of cash management products for Greater China. SAFE would also cancel restrictions that required multinational companies to cooperate with a limited number of banks.
Companies with cross-border payment and collection volumes exceeding $100 million in the previous year would qualify under a simpler regime. Provided the company did not avail itself of funds from a local government financing platform or operated in real estate, it could send back home up to 30 percent of profits. The new rule is part of the government’s drive to liberalise regulations on foreign exchange. Clearly, the ongoing US-China trade war has given fresh impetus to the demands of foreign corporates operating in China. For example, People’s Bank of China (PBoC) governor Yi Gang said over the weekend he was aware that foreign companies were seeking better hedging arrangements. He said the central bank would also be moving towards a flexible currency exchange rate policy and intervene less frequently to fix the exchange rate.
Both developments, however, cannot happen when capital controls remain in force. According to one economist, it's hard to imagine they'll be removed anytime soon. "The yuan is definitely more flexible now but it isn't a free float currency. Yi Gang is aiming for a free float currency but there's still some way to go. A pre-requisite is a freely open capital account but that won't happen in 2019. I think it's too risky for the central bank to open outflow channels in a weakening economy. The authorities would not want to add capital outflow risks” said Iris Pang, Greater China economist for ING Wholesale Banking.
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