China extends foreign exchange cash pooling pilot programme to multinationals

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1 China extends foreign exchange cash pooling pilot programme to multinationals nationwide 1 Briefing note May 2014 China extends foreign exchange cash pooling pilot programme to multinationals nationwide China's foreign exchange cash pooling pilot programme (Pilot Programme) has been implemented among 73 multinational companies (MNCs) in selected provinces since late In light of the positive results achieved, which included annual cost saving of over RMB100 million by participating MNCs in Beijing, the State Administration of Foreign Exchange (SAFE) has issued the Pilot Rules on Foreign Currency Cash Pooling of Multi-national Companies (the Rules) on 18 April The Rules have the effect of extending the Pilot Programme nationwide as from 1 June Who is eligible? A MNC group is eligible to participate in the Pilot Programme if it has: sufficient internal infrastructure to operate foreign exchange cash pooling and a real business demand processed foreign exchange payments and receipts of more than USD100 million in the last fiscal year on an aggregate basis for the entire group not violated any provisions on exchange control in the last three years or since establishment (whichever the shorter) members that have shareholding relationship with each other and are classified as "Category A" enterprises under the List of Enterprises with Trade-related Foreign Exchange Receipts/Payments. Except for finance companies, other financial institutions of an MNC group may not participate in the Pilot Programme. Key issues An eligible MNC located anywhere in China may apply to participate in the cash pooling pilot programme as from 1 June It may open either the domestic or international foreign exchange master account, or both. Restrictions on account opening and remittance still exist. See diagram here to show money flow and account structure under the programme. Also see table here which lists the main differences between cash pooling under the nationwide programme and that within the Shanghai free trade zone.

2 2 China extends foreign exchange cash pooling pilot programme to multinationals nationwide What are the application procedures? To participate in the Pilot Programme, an eligible MNC group must appoint a company within the group as the leading company. The leading company must then file with the relevant provincial SAFE branch. The MNC group must also develop a business plan with its account bank to set out details relating to its proposed business model under the Pilot Programme and submit it as part of the filing documents. How does the dual-account structure work? The Pilot Programme inherits the dual-account structure implemented in selected provinces previously as well as the China (Shanghai) Free Trade Pilot Zone (Shanghai FTZ). A participating MNC group may open both a domestic foreign exchange master account (Domestic Master Account) and an international foreign exchange master account (International Master Account). Under the Pilot Programme, an MNC has the option to set up both or just one of the two accounts. What is the Domestic Master Account for? The Domestic Master Account could be used for pooling foreign currency positions of onshore participating group members. Loans from onshore banks may not be pooled unless such loans were to repay foreign debts or to extend outbound loans. Intraday and overnight overdrafts are allowed in the Domestic Master Account for external payments. Funds in this account can also be used to buy wealth management products. What is the International Master Account for? The International Master Account can be used for pooling cash positions from offshore participating group members and proceeds from offshore financing activities. Remittance among the International Master Account and other offshore accounts is not subject to PRC exchange control restrictions. Are there any legal restrictions on account opening? Both the Domestic Master Account and the International Master Account can be multicurrency and sub-accounts may be set up. SAFE permits a leading company to open accounts at no more than 3 banks for cash pooling services. Different business units of an MNC may work with their specific account bank to develop a multi-account structure adapted for the corporate structure.

3 China extends foreign exchange cash pooling pilot programme to multinationals nationwide 3 Is remittance still subject to control? Yes, remittances from the Domestic Master Account to the International Master Account (Outward Remittance) and vice versa (Inward Remittance) are still subject to quota control. Unless with SAFE's approval, Outward Remittance is only allowed up to 50% of the net assets of the onshore participating members. Inward Remittance is allowed within the aggregate foreign debt quota of the onshore participating group members. Onshore participating group members may opt to contribute all or part of its borrowing gap/foreign debt quota to the cash pooling. Aggregated Foreign Debt Quota = All Onshore Participating Group Members' Borrowing Gap/Foreign Debt Quota Registered Mid-term and Long-term Foreign Debts Outstanding Short-term Foreign Debts Reserved Borrowing Gap/Foreign Debt Quota However, if an MNC engages in any sensitive industries, it must consult with SAFE before aggregating its foreign debt quotas. Inward Remittances should be registered as separate foreign debts according to the identity of the lender and the type of currency involved. What are the advantages of cash pooling? Unlike other MNCs, a participating MNC can use the Domestic Master Account to collectively process the cross-border payments and receipts of its onshore group members under their current account items. This would facilitate MNCs that have a well-established treasury centre in China. The account bank has full discretion in deciding whether to request for any supporting documents and if so, what documents would be needed. Assuming that physical settlement takes place at least monthly, an MNC that participates in the Pilot Programme may net off relevant payments and receipts in the form of book entries. The MNC should, however, be aware that it must still attend to tax filings for payment outside China for service items. In addition, the MNC must keep sufficient record for each individual transaction to satisfy relevant reporting obligations and potential inspection by regulatory authorities.

4 4 China extends foreign exchange cash pooling pilot programme to multinationals nationwide How does money flow among onshore accounts under the Pilot Programme? Foreign currency capital funds and foreign debt drawdowns pooled into the Domestic Master Account could be settled into RMB and deposited into a special RMB account for future payments so long as it is within the business scope of the relevant participating group member. This is more flexible than before, when only a case-by-case settlement was allowed as a specific demand for funding aroses. The use of capital funds and foreign debt drawdowns continue to be subject to existing regulations. The diagram below illustrates the account structure and how money flows under the Pilot Programme: Onshore Cash positions Domestic Master Account Outwards remittance Inwards Remittance International Master Account* Cash positions Offshore Offshore Group Members Onshore Group Members Payments within business scope and subject to restrictions Settlement Onshore RMB Accounts Onshore 3 rd Party Accounts Payments and receipts under current account items on a netting basis Free payments and receipts Offshore 3 rd Party Accounts *In terms of onshore accounts, only the Domestic Master Account can be used to remit money into, or receive money from, the International Master Account.

5 China extends foreign exchange cash pooling pilot programme to multinationals nationwide 5 How does the Pilot Programme compare with that of the Shanghai FTZ? MNCs that have already been approved to operate cash pooling arrangements can still do so under their existing approvals. Alternatively, they may switch to operate under the Pilot Programme by making a new filing application. MNCs that have treasury centres registered in the Shanghai FTZ can also select between the Pilot Programme and the foreign exchange cash pooling pilot programme specific to the Shanghai FTZ (Shanghai FTZ Programme). The table below sets out the main differences between the Pilot Programme and the Shanghai FTZ Programme: Issues Pilot Programme Shanghai FTZ Programme Endorsement of local authority N/A Consent from the Shanghai FTZ Administrative Committee is required Eligibility requirement: amount of foreign exchange payment and receipts in the last year Multiple Domestic Master Accounts/International Master Accounts The opening of the Domestic Master Account or the International Master Account USD100 million Allowed Allowed No requirement Not specified Not explicitly allowed, but should be permitted in practice Onshore foreign currency loans pooled into the Domestic Master Account Only those for repaying foreign debts and extending outbound loans are allowed. Cannot be pooled

6 6 China extends foreign exchange cash pooling pilot programme to multinationals nationwide Issues Pilot Programme Shanghai FTZ Programme Discretionary settlement of foreign exchange Allowed for both capital funds and foreign debt drawdowns Only allowed for capital funds Reserving part of borrowing gap/foreign debt quota Allowed Not specified Adjustment of Aggregated Foreign Debt Quota Not specified Allowed for no more than once in a year In comparison, the Shanghai FTZ programme has a lower entry threshold. Notably, SAFE has in fact requested the Shanghai FTZ Administrative Committee to grant approval to cash pooling applications to the extent practicable. However, the Pilot Programme allows more flexible operation and may better suit an MNC that has a sufficient amount of cross-border payments and receipts. Potentially, these two regimes might be merged in the future. What is the significance of the Pilot Programme? The extension of the Pilot Programme to MNCs nationwide clearly indicates that SAFE is seriously relaxing China's rules on foreign exchange control. SAFE has been carefully testing the water via experimental programmes in selected areas and extending such programmes to other parts of China only if satisfactory results are achieved. On a policy level, however, SAFE did not introduce any breakthrough in the Rules that would further facilitate the cross-border remittance of funds. The Pilot Programme still cannot be used to materially increase the flexibility of moving funds into or outside China. Therefore, the difficulty in accessing the offshore financing market remains. We expect that quantitative changes in facilitating cross-border payments and receipts will finally lead to breakthroughs when these changes reach a critical mass.

7 China extends foreign exchange cash pooling pilot programme to multinationals nationwide 7 Contacts Yang Tiecheng Yin Ge Partner Senior Associate E: tiecheng.yang@cliffordchance.com E: yin.ge@cliffordchance.com This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. As is the case for all international law firms licensed in China, we are authorized to provide information concerning the effect of the Chinese legal environment, however we are not permitted to engage in Chinese legal affairs in the capacity of a domestic law firm. Should the services of such a firm be required, we would be glad to recommend one. Clifford Chance, 40th Floor, Bund Centre, 222 Yan An East Road, Shanghai , People's Republic of China Clifford Chance 2014 Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC Registered office: 10 Upper Bank Street, London, E14 5JJ We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications Abu Dhabi Amsterdam Bangkok Barcelona Beijing Brussels Bucharest Casablanca Doha Dubai Düsseldorf Frankfurt Hong Kong Istanbul Jakarta* Kyiv London Luxembourg Madrid Milan Moscow Munich New York Paris Perth Prague Riyadh Rome São Paulo Seoul Shanghai Singapore Sydney Tokyo Warsaw Washington, D.C. *Linda Widyati & Partners in association with Clifford Chance.