China's monetary authorities have recently enhanced a cash pooling pilot program, bringing new capabilities to multinational corporations (MNCs) operating in certain regions. This upgraded program enables MNCs to combine cash pools comprising both Chinese Yuan (RMB) and foreign currencies, facilitating the efficient cross-border utilization of funds. The latest revision of the pilot program grants greater flexibility to participating MNCs by allowing them to determine the proportion of foreign debt and overseas loans included in the cash pool. In this article, we will explore the expansion of China’s cash pooling pilot program since its inception and delve into the advantages it brings to both MNCs and banks.

On May 19, 2023, the People's Bank of China (PBOC), the central bank of China, and the State Administration for Foreign Exchange (SAFE) jointly announced a significant enhancement to the pilot program. Under this upgrade, multinational corporations (MNCs) will now have the authority to independently determine the collection ratio for foreign debts and overseas loans, among other modifications. The updated pilot program will initially be launched in Beijing and Guangdong, following its previous expansion to several regions in July 2022.

Background

The China cash pooling pilot program was initially introduced in March 2021 through a joint statement by the People's Bank of China (PBOC) and the State Administration for Foreign Exchange (SAFE). This program allowed selected multinational corporations (MNCs) in Beijing and Shenzhen to integrate both RMB and foreign currency cash pools, facilitating cross-border fund utilization.

Initially, 10 MNCs participated in the pilot program, with five companies in each city, including Sinochem Group, COFCO Corporation, China General Technology (Group) Holding, China Aviation Industry Corporation, and Shell Group. These companies conducted cross-border fund transactions totaling around US$50 billion during the initial phase of the pilot program.

Within a year, the pilot program expanded in Shenzhen and included 35 additional companies, including renowned names like Walmart and Flex Ltd.

In July 2022, the pilot program was extended to more cities and provinces, such as Shanghai, Guangdong, Shaanxi, Zhejiang, Qingdao, and Hainan, with the inclusion of the first MNC in Hainan on July 6. Furthermore, the program itself experienced an expansion in its scope.

Who is eligible? 

The selection of participating MNCs in the pilot program is conducted by the local branch of the State Administration for Foreign Exchange (SAFE) in each jurisdiction where the program is implemented.

According to the rules established in 2021, the pilot program specifically targets large multinationals with high credit ratings. Additionally, both the domestic and foreign member companies associated with the MNC must fulfill certain criteria:

For domestic member enterprises: They should have achieved an operating income of at least RMB 10 billion (US$1.4 billion) in the previous year and a total balance of payments in domestic and foreign currencies of at least RMB 7 billion (US$988.9 million) in the previous year.

For foreign member companies: They should have attained a total operating income of at least RMB 2 billion (US$282.5 million) in the previous year.

Both domestic and foreign member companies must not have any records of violations of UN Security Council sanctions resolutions.

For domestic member companies: They should not have significant violations of laws and regulations during their cross-border business operations in the past two years. Companies listed under Class-A for foreign exchange receipts and payments for trade should not be included in the key supervision list of companies engaged in RMB settlement for export goods trade.

For foreign member companies: They should not belong to the category of companies subjected to restrictions and prohibitions on overseas investment, as outlined in the Guiding Opinions on Further Guiding and Regulating the Direction of Overseas Investment.

What can the MNCs do under the program?

Under the pilot program launched in 2021, MNCs have been granted permission to integrate their existing cash pools and enable cross-border funds in both RMB and foreign currencies between their domestic and overseas subsidiaries.

The program sets a limit for foreign debt, which is capped at two times the accrued owner's equity of the cash pool, aligning with SAFE's 2019 Regulations on the Centralized Operation and Management of Cross-border Funds of Multinational Corporations. Additionally, there is a cap on overseas lending at 0.8 times the accrued owner's equity of the fund pool.

Furthermore, the pilot program facilitates the transfer and utilization of funds by allowing direct transfers of foreign exchange settlement funds from the domestic capital account to the domestic RMB capital account.

Participating companies are also allowed to utilize domestic foreign exchange derivatives to hedge against currency exchange fluctuations and manage associated risks.

Under the pilot program, participating MNCs are granted the ability to purchase a specific quota of foreign currency as needed without seeking approval from SAFE for each transaction. The funds obtained from these foreign currency purchases can be deposited into domestic accounts for overseas payments. The quota for foreign currency purchases is determined on a case-by-case basis by SAFE.

In July 2022, the pilot program was expanded to include more areas and companies, broadening its scope. This expansion allowed MNCs to manage the centralized receipt and payment of domestic and foreign currencies for their overseas member companies in China. Under this policy, the host company can centrally handle the funds related to trade transactions between the overseas member companies listed in the cash pool and their overseas trading counterparts. These transactions utilize a portion of the centralized debt limit recorded in the cash pool and require international balance of payments reporting.

Further advancements were implemented in May 2023, enabling MNCs to determine the foreign debt collection ratio and overseas operations based on the macroprudential principle. This increases the flexibility of cross-border capital operations. However, this upgraded policy is currently only applicable in Beijing and Guangdong.

What benefits can MNCs and banks derive from the program?

The pilot program enhances the efficiency of cross-border capital coordination and utilization for MNCs. It allows them to manage funds in both local and foreign currencies effectively, leading to decreased currency exchange risks and financial costs. The integration of RMB and foreign currency cash pooling streamlines the flow of cross-border funds, reducing manual processes and improving overall efficiency. Additionally, facilitating easier foreign currency purchases helps mitigate the risks associated with exchange rate fluctuations, providing convenience to multinational groups in managing cross-border funds and effectively managing exchange risks.

Under the current regulations, the process of foreign currency purchases requires approval from SAFE, resulting in significant delays. However, the pilot program brings benefits to banks by enhancing their capabilities in cross-border services and risk management, as stated by the Beijing branch of SAFE. Standard Chartered also highlights the optimization of service delivery, improving work efficiency and reducing operating costs.

Furthermore, the pilot program supports the internationalization of the RMB, a key objective for the government. The authorities have announced that the program will facilitate cross-border payments in RMB, contributing to this goal. In addition, the program is expected to expand beyond its current scope, with continued optimization to enable the cross-border utilization of mixed currency funds. It is possible that the authorities may lower the eligibility requirements in the future to allow more companies to participate, considering that the current criteria exclude the majority of companies.