The evolving regulatory environment in China

As both renminbi and foreign exchange deregulation progress in China, new opportunities for treasury management emerge, with both the State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBOC) recently announcing important changes. Yet taking advantage of these opportunities is not always quite as straightforward as it seems, due to the different ways in which the two regulators concerned operate. Nicole Lin, Head of Product Management of Global Payments and Cash Management, HSBC China, outlines some of these differences and their practical implications for corporate treasurers.

China - Shanghai

In the past two years financial deregulation in China has taken significant strides. In the case of the renminbi (RMB), there has been appreciable exchange and interest rate liberalisation on the part of the PBOC. April 2012 saw the regulator widening the currency's permissible foreign exchange (FX) trading range, while July 2013 saw the removal of loan interest rate controls. The accelerated cross-border use of the currency was facilitated in July 2013 by the introduction of simplified transactional workflow for current account activity and the nationally applicable policy of RMB outbound lending.

On the foreign exchange side, SAFE has been following a similar path with the transformation of administrative controls. August 2012 and September 2013 saw the respective introduction of current account reforms relating to goods and service trade, which made the processing of transactions relating to these activities appreciably more convenient from a corporate treasurer's perspective. On the capital account side, December 2012 and May 2013 saw new rules issued relating to Foreign Direct Investment (FDI) and foreign debt.


Recent developments

More recently there have been further important new measures declared by both the PBOC and SAFE in the area of cash management. June 2014 saw RMB internationalisation pushed a stage further by the PBOC with the announcement of nationwide centralised payments and collections, including netting and Payment On Behalf Of (POBO) and Receipt On Behalf Of (ROBO), and RMB two-way cross-border cash sweeping. The same month saw SAFE open the way nationwide to centralised foreign currency management, with various measures enabling two-way foreign currency cross-border cash sweeping and centralised payments/collections, including netting and POBO/ROBO.

Under the new PBOC measures banks should be allowed to conduct individual cross-border trade settlement in RMB[1]. At the same time, the programme allowing multinational companies to conduct centralised treasury management in terms of RMB cross border initiatives would be extended beyond its initial pilot area of the Shanghai Free Trade Zone. There were a number of notable changes regarding the RMB's relationship with other currencies: a pledge to allow market forces a greater role in setting the RMB's exchange rate[2], a move towards direct trading of the RMB and other foreign currencies, and the simplification of procedures for settling cross-border current item related transactions in RMB.

Alongside the regulatory changes, the PBOC encouraged banks to conduct cross-border RMB settlement operations, as well as to step up their lending support for trade. The PBOC also pledged more exchange rate reforms in a package of measures designed to support export growth, and encouraged financial leasing companies to issue bonds and participate in a credit securitisation pilot programme to expand financing channels.

SAFE's June announcement effectively extended the pilot schemes enabling centralised foreign currency management that it has been running on a trial basis since Q4 2012 to a national roll out. (Although this will still be on a pilot basis, so there are a certain criteria for participating corporates.) The measures still require corporates to file solutions and procedures with local SAFE branches and obtain approval, but they nevertheless provide multinationals with considerable flexibility and operational convenience in their foreign currency activities. Domestic foreign currency cash concentration becomes straightforward, as does cross-border concentration (albeit subject to two-way quota controls), which makes it possible to include China in regional liquidity management structures and to conduct intercompany financing from/to China.

The new SAFE measures also allow centralised foreign currency payment and collection, which opens the door to centralised payables/receivables management on behalf of business units (POBO/ROBO). Centralised FX conversion and netting are now possible in much the same way as in less regulated Western European markets, as in-house banking.


Divergent approaches

Encouraging as these various changes are for corporate treasurers, the actual practical details of implementation tend to vary not just between SAFE and the PBOC, but also across their various local offices. Both PBOC and SAFE Headquarters are willing to allow local offices more flexibility in designing detailed implementation guidelines. At a high level, both regulators also take a very similar stance, with relatively rapid simplification of regulation relating to current account items, but a more measured approach to capital account items.

However, there are differences in the general mindset of the two regulators. The PBOC has the clear objective of internationalisation of the RMB and anything that will assist in this is, within reason and if consistent with the main objective, generally acceptable. By contrast SAFE has many years’ experience in dealing with cross-border transactions and has developed very comprehensive and complex procedures and rules for these. Broadly speaking, both of them take a phase by phase approach to deregulation, though the PBOC tends to move at a faster pace. (For example, SAFE's original pilot schemes were very tightly controlled and only available to carefully selected corporates.)

The two authorities also have very different day-to-day working styles. For instance, when PBOC headquarters issues regulation changes, it does not provide much in the way of detailed implementation instructions, thus leaving scope for local PBOC offices to implement the changes in accordance with their own style. SAFE takes a different approach and will typically provide extremely detailed guidance about what is or is not permissible, which local SAFE offices will usually follow, although there may still be some minor nuances of understanding and interpretation at a local office level. Local SAFE offices also need to obtain case-by-case approval from headquarters for any corporate treasury applications under the pilot regulations.

While SAFE's rule based approach may sound more onerous, it is at least predictable and consistent. The procedures are clearly laid out in detail and if carefully followed will enable corporate treasurers to take advantage of any permissible opportunities. The PBOC's less itemised approach means that there can be very significant differences in the way its announcements are implemented at a local office level, which is an important consideration for treasurers dealing with business units that are widely distributed across China.

For example, the PBOC's Shanghai office will in general have a more open attitude than its offices in some other cities. Elsewhere, in cities that have not run (or are not particularly anxious to run) pilot schemes, local PBOC offices will tend to be more conservative. These variations can involve treasurers in considerable extra work. When PBOC headquarters issued regulations in 2013 relating to the opening up of current account items and outbound RMB lending, the implementation at a local level varies, with some cities requiring additional procedures or documentation. In this respect, selecting an experienced bank with good regulatory relationships is critical, not just for successful participation but also to ensure smooth implementation through stronger market and regulatory understanding.


Corporate involvement and banking partners

One area where both SAFE and the PBOC tend to operate in a similar fashion is consultation with corporates and banks, a process that was first introduced some five years ago. This is an area where the right choice of banking partner can be extremely advantageous. If the bank has close regulatory relationships, it will often be invited by regulators to suggest and introduce possible pilot scheme participants from among its client base. These clients will also benefit from opportunities to communicate with regulators to provide feedback and discuss requirements, plus gain a better understanding of regulators’ intentions and the direction of future regulatory development.

It is a business imperative for banks to keep abreast of the regulatory developments, not just in following the regulations but also in understanding their 'spiritual direction', in order to plan ahead effectively. Furthermore, if the bank also has close regulatory relationships, it will often be invited by regulators to suggest and introduce possible pilot scheme participants from among its client base.

Actively participating in these pilot schemes is valuable, because in addition to gaining first mover advantage, it also fosters goodwill with regulators. In addition, the tolerance level at the pilot stage is higher, so that corporates may have more leeway to design structures that are beneficial to their particular circumstances, although it is still subject to PBOC/SAFE’s approval.

These participants will also benefit from opportunities to communicate with regulators to provide feedback and discuss requirements, plus gain a better understanding of regulators’ intentions and the direction of future regulatory development.

Apart from the pilot scheme opportunities that this presents, it also gives corporate treasurers a chance to gain a better insight on both current and possible future regulatory developments. Furthermore, both SAFE and the PBOC are open to corporate insights and suggestions. While a corporate's suggestion may not be immediately implemented, they will be noted for possible future use and if a related pilot scheme is introduced, the corporate is likely to be invited to participate.

Therefore, a bank that can facilitate the necessary regulatory introductions, as well as provide information on how best to incorporate a corporate client's China business into its global treasury picture in the context of current regulation, clearly adds appreciable value.


Conclusion: looking to the future

The pace at which both the PBOC and SAFE are deregulating RMB and foreign exchange continues to gain momentum, providing corporate treasurers with new opportunities to improve their existing payments and cash management processes.

These developments are already enabling corporates to undertake a variety of treasury activities, such as two-way cross-border sweeping of both RMB and major foreign currencies, which make it possible to include China in global liquidity management structures and to conduct intercompany financing. Furthermore, treasurers may now also centralise their payments/collections and establish POBO/ROBO and netting structures to obtain additional efficiencies for their companies.

It is, however, important to be aware of the different approaches taken by the PBOC and SAFE. Many of the recent regulatory changes are subject to interpretation, even amongst local regulatory offices, which can make it challenging to gain a clear understanding of the possibilities and the implementation procedures.

In this sort of environment, corporates should ensure that they are selecting a banking partner that understands the nuances of the regulations and the regulators. Both SAFE and the PBOC operate in consultation with corporates and banks, so the right banking partner will be able to make regulatory introductions, recommend possible pilot scheme participants and potentially help to shape the direction of future regulatory developments.


[1] The regulator has been conducting trials of cross-border trade settlement in RMB in some pilot locations since July 2009, including Shanghai and four cities in Guangdong (since July 2009) then 18 further locations including Beijing and Xinjiang (since June 2010) -

[2] Subject to currency stability and the maintenance of balanced international payments.




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