China Expands Currency Conversion Program for MNC
On May 19, 2023, the People’s Bank of China (BOC) and the State Administration of Foreign Exchange (SAFE) released the Policy on Continuous Optimization of Cross-border Funds Concentration and Operation of Multinational Corporations in Domestic and Foreign Currencies, decided to carry out pilot projects in Beijing, Guangdong, and Shenzhen to optimize and upgrade the policy of centralized operation and management of cross-border funds of multinational corporations (MNCs) in local and foreign currencies.
The main contents include:
- optimize and integrate the existing policy requirements related to the centralized operation of cross-border funds of multinational corporations, benefiting more enterprises;
- increase the freedom of cross-border fund operation of enterprises, allowing multinational corporations to decide on their own the proportion of foreign debt and overseas lending in accordance with macro-prudential principles;
- support multinational corporations to carry out a centralized operation of cross-border funds in CNY;
- simplify the filing process and materials related to the use of funds review.
This initiative will help accelerate the construction of a new development pattern, enhance the linkage effect of the two domestic and international markets and resources, and better support the development of the headquarters economy.
Back in July 2022, it is worth noting that the [previous version] of the pilot program had already been expanded to multiple regions based on the government notice. The additional cities and provinces include Shanghai, Guangdong, Shaanxi, Zhejiang, and Qingdao. The host company is allowed to centrally collect and pay the funds related to trade transactions between the overseas member companies listed in the cash pool and overseas trading counterparts. These transactions will take up some of the centralized debt limit recorded in the cash pool and require an international balance of payments reporting.
The latest upgrade allows MNCs to determine the collection ratio of foreign debt and overseas according to the macroprudential principle, however, this policy is currently only being implemented in Beijing and Guangdong.
MNCs that meet the following conditions can choose a domestic enterprise as the host enterprise to centralize the operation and management of funds of domestic and foreign member enterprises, to carry out centralized foreign debt lines, centralized overseas lending lines, centralized collection and payment of current account funds and one or more of the following operations can be carried out:
- Having real business needs;
- Have a sound cross-border fund management structure and internal control system;
- Establish the corresponding internal management electronic system;
- The scale of domestic and foreign currency balance of payments exceeds USD 100 million in the previous year (calculated on a consolidated basis for domestic member enterprises participating in cross-border funds centralized operation business);
- No major foreign exchange violations in the past three years (for enterprises established less than three years ago, no major foreign exchange violations since the date of establishment)
- If the host enterprise and the domestic member enterprises are enterprises in the list of trade foreign exchange revenue and expenditure, the classification result of trade in goods shall be a category – A;
- Other prudential supervision conditions stipulated by the State Administration of Foreign Exchange.
The program has been helpful to MNCs and banks.
The pilot program brings substantial improvements to the efficiency of cross-border capital coordination and utilization for MNCs. It enables them to effectively manage funds in local and foreign currencies, reducing currency exchange risks and financial costs.
It enables MNCs to purchase foreign currencies more easily and helps to reduce the risks of exchange rate fluctuations. This is a significant convenience because, under the current rules, foreign currency purchases must be approved by SAFE, greatly slowing the process.
The pilot program “reduces manual processes and greatly improves the flow of cross-border funds by integrating the process of RMB and foreign currency cash pooling. It brings optimization to the service delivery through improving work efficiency and reducing operating costs.
The pilot program is also beneficial to banks that are servicing the companies by “enhancing their overall capabilities in cross-border business services and risk management”, according to the Beijing branch of SAFE.
Finally, the pilot program also helps to advance the internationalization of the RMB, a core goal of the Chinese government. Beyond the current scope of the pilot program, the monetary authorities have stated that they will continue to optimize the program to facilitate cross-border utilization of mixed currency funds. It is also possible that the authorities will lower the requirements in the future so that more companies can participate, as the current bar means that the majority of companies are ineligible for the program.
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