News updates: Freeing the People’s Currency – Shanghai Pilot Free Trade Zone Promotes Expansion of Cross-border RMB business

Ever since the People’s Bank of China (the “PBC”), China’s central bank, sought to internationalize the Renminbi (the “RMB”) in the late 2000’s, offshore RMB markets have developed quickly. Consequently, the accumulation of offshore RMB has greatly facilitated the cross-border settlement of the currency. However, despite efforts of deregulation, it was still hard to move RMB in and out of China due to the country’s strict monitoring and burdensome compliance requirements.

Fortunately, the pains with moving the RMB across the borders may be alleviated soon with a new pilot scheme. Like the fire of the VAT reform that was ignited in Shanghai and soon spread to the rest of the country, the new scheme on RMB cross-border business was again initiated in the city. On 20 February 2014, the Shanghai headquarter of the PBC promulgated the Notice on Supporting the Expansion of RMB Cross-border Business in China (Shanghai) Pilot Free Trade Zone (the “Notice”). The Notice sets out the much relaxed operational requirements regarding the RMB cross-border settlement in the Shanghai’s Pilot Free Trade Zone (the “FTZ”), aiming to keep the hassles to a minimum.

Notably, the Notice greatly facilitates RMB cross-border financial services in the following areas:

(1)   RMB cross-border settlement

Banks were previously required to examine documentary evidence when they carried out RMB cross-border transactions. However, this requirement no longer served its intended purpose when it became an onerous and widely-abused formality: banks’ unduly focus on contracts and invoices induced blatant forgery thereof. 

Instead of “show me the papers”, the new rule is that of “know your clients”, “know your business” and “due diligence”. This means banks in Shanghai are now required to know what their clients are up to in general when settling their RMB cross-border transactions for the purposes of current account transactions and direct investment. This is not only a huge load off the shoulders of both parties, but also a practice in line with internationally accepted banking standards.

(2)   Overseas RMB loans

If you are a company, the maximum amount of overseas RMB loans you can borrow is the difference between your total investment and registered capital. This rigid requirement is bound to be replaced by the new rule that the quota is to be calculated by a company’s paid-in capital times the “macro prudential policy parameter”. This parameter is to be adjusted in consideration of wider economic circumstances, and introduces flexibility on the part of policy makers. 

(3)   Cross-border mutual RMB cash pooling

The cross-border mutual RMB cash pooling makes easier the free flowing of RMB fund for multinational corporations. It allows multinational corporations to utilize the idle RMB funds of their Chinese entities set up in the FTZ. The pooling also defers payments of withholding tax on profit distribution, and saves companies the hassle of having to go through the notoriously tedious approval procedures.

(4)   Centralized collection and payment for current account transactions

The past practice was that, to carry out cross-border current account transactions, companies are required to apply to get those transactions processed one by one. This transaction-by-transaction based collection and payment incurred a lot of compliance costs on the part of companies.

With one-off prior agreements with affiliated companies and important trading partners, companies in the FTZ can now centralize the collection and payment for such transactions therewith. The centralization will greatly save costs and is conducive to companies’ fund management.

The difference between “centralized collection and payment for current account transactions” and “cross-border mutual cash pooling” is that the former concerns authentic commercial transactions while the latter is about moving idle funds among member companies. And both measures are meant to attract more multinational corporations to set up headquarters and affiliates in the FTZ.

The new scheme was introduced against the background of a declining RMB in the first few months of 2014, reversing its 8 years of gradual appreciation against major currencies. It is noteworthy that a month later on 14 March 2014, the PBC announced to double the RMB trading band from 1 per cent to 2 per cent. This introduced more flexibility to the currency. As such, the new scheme, in light of the government’s relaxed grip on its currency, can be seen as another step towards greater internationalization and liberation of the people’s currency. But how far can the government let go remains anyone’s guess.