International Cash Pooling in China: to join the pool, follow the rules

by Bruno Francois, Head of Transaction Banking, Greater China, BNP Paribas

The RMB rules change fast and it requires hands-on expertise and thorough knowledge to tailor end-to-end RMB cash pooling solutions. Practically speaking, this is what corporates should be aware of today.

1/ Within the Shanghai Free Trade Zone

Corporates assigning an entity incorporated in the Shanghai Free Trade Zone (SFTZ) as their RMB pool header will get support from the People’s Bank of China (PBOC). Concretely, the PBOC facilitates the implementation of an international liquidity structure by:

• Not requiring pre-approval.
  
  
• Not applying any quota to overseas lending and borrowing funding, as long as the liquidity in the pool comes from daily operations and capital investment.
• On the other hand, funding from external financing, shareholder loans and bilateral entrusted loans are not allowed in the pool.

The simplified scheme ‘A 2-way process to optimise cross-border pooling in China’ focuses on the inter-company interest rate setting in the pooling structure.

To achieve the optimal interest rate setting in the China mainland side of the pool, corporates have two options:

• They can apply their internal fixed rates, benchmarked to the PBOC’s official rates for both their domestic and offshore intercompany lending.
  
  
• BNP Paribas provides an alternative that is only available in China: the Optimal Internal Rate Scheme (OIRS) solution, a fully tax-compliant solution and an automatic calculation of arm’s length inter-company interest rates. The OIRS guarantees the most appropriate entrusted loan arrangement and fair-treatment of the benefit/cost allocation amongst all pool participants.

For the SFTZ as well as for the overseas part of the pool, corporates can apply their internal fixed rates as long as they respect the arm’s length principle for internal transfer pricing purposes.

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2/ Outside the Shanghai Free Trade Zone

On the 4th of November 2014, the PBOC officially released a set of rules applicable to nationwide RMB cross-border pooling. In a nutshell, this is what corporates that seek to set up RMB cash pooling in mainland China should be aware of.

The PBOC Circular N° 324 states that only operational and capital investment funds are allowed in the cash pool, and determines how the inbound net flows should be capped (no quotas on outbound flows).

To join the pool, the participating entities need to abide by the following requirements:

• The previous year’s aggregated operating revenue of all the onshore member entities should be RMB 5bn.
  
  
• The previous year’s aggregated operating revenue of all the offshore member entities should be RMB 1bn.
  
  
• All member entities should be in operation for more than 3 years.

Entities operating as local government financial vehicles or those in the real estate industry cannot join the cash pool. The same applies to entities included in the PBOC’s key supervision list of exporting enterprises settling in RMB. Corporates in the SFTZ (Shanghai Free Trade Zone) can either opt for the new nationwide regulations or for the SFTZ’s. However, they should choose carefully as their decision is unalterable.

On the 12th of December 2014, the Chinese State Council finally approved the establishment of free trade zones in Tianjin, Fujian and Guangdong as well as the extension of the SFTZ about a year after its opening.

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