Cross-border cash pooling is the biggest winner among FTZ reforms
Multinational corporations have hailed cross-border cash pooling as one of the most beneficial financial reforms carried out by Shanghai’s pilot Free Trade Zone.
As part of the efforts by the zone to liberalize capital account and free up currency movement, the cash management technique allows multinationals to integrate their onshore cash pool in China with their offshore global treasury centers and conduct a two-way automatic sweeping of the yuan.
Under the cross-border cash pooling, balances on onshore and offshore accounts are moved automatically to create a liquidity position for a group of subsidiaries, allowing headquarters to better monitor the working capital.
Data from the China (Shanghai) Pilot Free Trade Zone Administration showed that 209 companies have carried out the yuan pooling, with the amount of capital movement totaling 295 billion yuan (US$46.2 billion) by the end of September.
Dover Corporation, a diversified manufacturer of industrial equipment and components, is one of the beneficiaries.
“The cash pooling is significant for Dover as it improves the efficiency of working capital, saves currency exchange costs and promotes yuan to become one of our reserve currencies,” said Zhang Yuepeng, president of Dover Asia Pacific.
Dover set up its Chinese headquarters in Shanghai in 2009. As the company expanded its presence in China and across Asia, the Shanghai headquarters was upgraded to regional headquarters of Asia-Pacific in 2012.
However, due to capital restrictions in China, the Shanghai headquarters was unable to fully take over the regional financial operations and had to manage the liquidity of China and the rest of Asia separately.
Things started to change, however, when Dover was selected by the government as one of the two companies to participate in a pilot program for cash pooling in February 2014, months after the establishment of FTZ.
“It makes a world of difference,” Zhang said. “Without the cash pooling, it required complicated procedures and documents to get regulatory approval for every cross-border cash transfer, which could take a week or even a month in some cases.
“Now money transfer via cash pooling is automatic and real-time,” he said. “It encourages the use of yuan as working capital among multinational corporations like Dover and thus makes the internationalization of yuan a natural outcome of business demand.”
Zhang said the use of cash pooling was also strategically important for Dover as it offers a solution for “cash trap” — a problem faced by foreign companies as they tried to repatriate profits from China due to regulatory constrains and capital controls.
“The cash trap had been a major concern for Dover to increase investment in China,” Zhang said, “With cash pooling offering more freedom in cash movement, Dover China now has more sway in negotiating for investment.”
Another company that gained from cash pooling measures was Universal Scientific Industrial (Shanghai) Co Ltd, a unit of the ASE Group, the world’s largest semiconductor assembly and test services provider.
Saving costs
In 2014, Universal set up a subsidiary in Waigaoqiao, which is part of the FTZ, to build an account framework for cash pooling. Since then, the cash pooling has helped the company save 4 million yuan in bank interests alone.
“The mechanism allows our company to conduct integrated liquidity management and enables it to allocate funds to overseas branches any time,” said Dennis Liu, vice president and chief financial officer of Universal.
Liu said in the past, due to complexity in cross-border money transfer, overseas branches had to borrow from overseas financial institutions, which increased interest rate costs.
Liu expects his company to make 1 billion yuan worth of cash movement via yuan cash pooling in the next three years, saving more than 200 million yuan in interest rate costs.
While the yuan cash pooling has been promoted nationwide last year, the Shanghai FTZ has gone even further and started an experiment on foreign-currency cash pooling.
Currently, 75 companies in the zone have been approved to participate in foreign-currency cash pooling on a trial basis, according to the zone’s administration.
Financial reforms are at the heart of the experiment in Shanghai FTZ, which was established in 2013 as a laboratory to test some of China’s groundbreaking reforms.
A slew of measures have been put in place to free up financial operations in the zone, such as scrapping the need for administrative approval for overseas financing via free trade accounts and allowing account holders to raise up to twice the value of their registered capital.
The measures have revved up financial activities. The added value of financial industry in the zone jumped 27.2 percent year-on-year in the first three quarters this year, compared to the increase of 18.8 percent for the whole of 2014, according to official data.
Last month, the People’s Bank of China, China’s central bank, announced fresh support for financial reforms in Shanghai FTZ, setting out 40 goals which include piloting yuan convertibility under capital account, driving cross-border use of the yuan in trade, direct investment and financial investment, as well as wider opening of the financial services sectors.
“Proposals from PBoC constructed a framework that will bring Shanghai in line with peers as a global financial center,” Z-Ben Advisors said in a recent note.
The Shanghai-based consulting firm expected the new round of financial industry reforms to be implemented as early as the second quarter of 2016.
“As foreign firms step up their pace to build sales and servicing centers on the Chinese mainland, the FTZ is now becoming the default choice as locations for these centers,” it said.
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