Bank Relationships & Cash Management in China

Commentary

China is in the news a lot at the moment. Interestingly, this – well attended - call was very much in line with our usual discussions on the country: not a single mention of trade wars or tariffs. On the other hand, there was a lively discussion about all the usual issues related to pooling cash and managing banking relations – issues which show no sign of going away.

All peers on the call reported that business was strong, with most generating cash. They also repeated a theme familiar to people who know China: contrary to the common perception of a highly rigid and regimented society, there is a lot of confusion as to what the regulations actually are, and there are regular inconsistencies in how they are applied. 

This “summary” is long (the full report is 15 pages of granular detail): a lot of details were discussed, and these are generally appreciated. As always, these are the experiences and views of our peers, (lightly) edited for clarity.

The main topics:

• Domestic cash pooling: many, but not all, peers practice this. However, they do all come up against limits related to the equity of the pool header. 
• Cross-border pooling: this is where there is the most uncertainty.
  • There are two main schemes, operating under licences provided by either PBOC (People’s Bank of China) or SAFE (State Administration for Foreign Exchange). These have different quotas, rules and requirements and approval delays. 
  • There has been talk for some time that the two schemes will be merged, but there is little concrete evidence this is happening.
  • It has been suggested that, while existing schemes continue to operate, the approval of new ones has been slowed. Several peers are looking to implement new schemes, but have received conflicting advice from their banks on this.
  • It continues to be true that some Chinese cities are more open to approving cross border pooling than others: Shanghai works well, but one peer has found it very difficult to progress in Ningbo.
  • Usually, cross border cash pools must be zeroed at least once a year. However, some peers have seen this waived, while others have implemented cross border loans out of the country for periods of up to ten years.
  • It is not unusual to operate more than one domestic cash pool – and this appears to be becoming the case for cross border pooling, too. 
  • One peer has been told branches cannot participate in the pool – but again, advice on this is not consistent from one bank to the next.
  • Historically, cross border cash pools have been single currency, either USD or CNY. However, moves are being made to allow multi currency pooling.
  • In all cases, the amount which can be pooled is linked to the equity of the pool header: this is consistent with general Chinese thin cap rules, which link all lending to the size of a company’s paid in capital. Several peers reported that these rules are being re-examined, generally intending to simplify them and raise the limits – though, again, these aims are not always achieved.
  • It is not unusual for the Chinese authorities to ask about the foreign entity which heads the cross border pool. Some banks have taken this to mean they need full details of the use of the funds, as the pooling should not be a way of propping up thinly capitalised entities. However, this varies very much from one bank to another, and there is no formal requirement.
  • Two banks have told one peer the taxes are higher if the pooling transactions are automated, versus a manual initiation. We had not heard this before.
  • As is usual in China, peers (and their banks!) have often found innovative ways of satisfying the requirements. For example, one peer added a second header to their cross border pool to increase the equity based capacity.
  • In any case, both PBOC and SAFE continue to vary the rules: they are sensitive to the operational challenges facing MNCs.
  • None of the peers on this call represented Chinese owned companies, but an increasing number of Chinese MNCs now operate cross border cash pools, including state-owned enterprises. 
• Cash repatriation from China generally works well. 
  • The main methods for permanent repatriation are royalties and dividends: the only issue is the extensive documentation required. But once this is understood and managed, the process is smooth – provided, of course, there are sufficient retained earnings available for dividends.
  • Withholding tax is 10%, but can be reduced to 5%, for example, if the shareholder owns more than 25% of the entity – peers reported a stricter, and sometimes questionable, enforcement of this. Note: the general rate of WHT applied by the US on dividends is 30%.
  • Cross border intercompany loans are allowed, but prior approval is required, and they must usually be for a minimum tenor of one year. Many peers find these conditions too onerous, while one has approval for up to ten years.
  • Making cross border payments for goods and services is generally not an issue – but, again, documentation requirements vary from one bank to another.
• Banking relations: most peers use their global relationship banks – Citi, Standard Chartered, JPMorgan Chase and HSBC were all mentioned, and provide good service. 
  • Many peers also use Chinese banks: all expressed frustration at the lack of relationship management. Chinese banks, including giants like ICBC and BoC, operate very much as siloes: it is difficult, if not impossible, to leverage the relationship to obtain priority service from any given branch or area.
  • It is often still necessary to open local accounts in different cities for transactions such as taxes and payroll. One peer opened more than fifty accounts across the country for this reason, only to find the requirement no longer existed. Again, China is less regimented than people think…..
  • Balance reporting and sweeping cash work, though, again, unexpected complications may arise. Several peers complained about the excessive cost of MT 940s.
  • Competition between banks is severe – one peer received some very attractive pricing offers when they did an RFP.
  • One peer reported having their main relationship bank (HSBC) suddenly require full cash collateralisation for BADs (Bankers’ Acceptance Drafts). They are conducting an RFP with local banks who do not have this requirement. Again, there is a long history of challenges with this instrument, which is a key feature of the Chinese banking landscape.
  • One peer has a supply chain financing programme with a low take-up rate. They recently added a second programme (with HSBC), and are having more success, probably due to lower rates and an easier onboarding process.
  • Credit cards are not universally used in China: this has obliged one peer to open a relationship with ICBC, so they could get Union Pay cards for their employees. ICBC required a cash balance in each branch to cover the advance. 
• AliPay and WeChatPay are well known for being the largest and most sophisticated on-line payment systems in the world. They continue, however, to frustrate global treasurers:
  • One peer complained it is difficult to obtain timely reporting on the amounts pending on the platforms, which can be significant. This can be done by logging in to the portal; however, this usually requires a local phone number for the OTP, and Chinese language skills are needed.
  • Peers complained again about the well documented difficulty experienced in matching receipts on these platforms to invoices in the receivables ledgers in most international ERPs.
• For cash management, most peers who have cash they are not sweeping out of China invest in bank deposits or money market funds. They find other Asian banks, such as DBS, provide good rates. One peer has what used to be a common issue: their company works through joint ventures, and the JV partners often invest in instruments which may not be within the corporate policy. In this situation, it can be difficult to bring pressure to bear on the partner.

Bottom line: The business environment in China continues to be strong: our peers are generally profitable and generating cash. It is possible to manage the cash and repatriate it, and the authorities continue to emphasise that they are open for business. 

Of course, China remains China: the regulations are not always clear; they keep changing, and they are not always applied consistently. The banking system is very different: Chinese banks have a very different notion of relationship management from their counterparts in other countries. There is a lot of bureaucracy to be complied with, and the process can drive additional cost.

But, as we are seeing, it remains a very attractive market, which cannot be ignored.