Policy Changes Open China to the Middle Market

Regulatory shifts in China are making it easier to fund operations, manage working capital and run treasury operations.

In the fall of 2013, the Chinese renminbi (RMB) surpassed the euro as the second-most-used currency in trade finance, behind only the U.S. dollar. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) reported that in January 2012, less than 2 percent of world trade finance in value was denominated in RMB – today, the figure is approaching 9 percent. The RMB’s ascendance highlights how quickly global financial markets are changing, particularly in China.

Mark Perry, Global Commercial Banking executive for the western U.S. at Bank of America Merrill Lynch.

Mark Perry, Bank of America Merrill Lynch

New Chinese policies make the country more attractive for U.S. middle-market companies, which in the past often were discouraged from entering China because of the many rules and regulations in the broader region. For example, tax and regulatory policies in Asia made it difficult for firms to access cash within a number of countries in the region. As a result, expansion into China and other Asian countries was often limited to large, multinational corporations with significant resources.

But there are changes that are opening up China to middle-market companies and their treasury operations. For instance, since 2009, there has been an increase in the use of the RMB for both onshore and offshore settlement. More recently, with permission from the State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBOC), selected companies have been allowed to structure foreign currency and RMB cross-border sweep structures.

Businesses planning expansion into China should consider developing treasury strategies that can make it easier to engage and grow in this evolving market. For example, a growing number of middle-market companies are financing their operations within China rather than from the United States. Consider the case of Equinix, a data center and internet exchange provider that built operational facilities after a 2012 acquisition in China. The company structured both a fixed-asset credit facility and a working capital credit facility in China, which allowed it to expand without any business delays.

In other successful cases, U.S.-based companies in China have implemented RMB shareholder loans or injected capital in RMB, rather than only in USD. Other companies have begun invoicing in RMB for their exports to manage FX risks and create a natural hedge against their RMB payables onshore.

Just opening a bank account in another country can be difficult because of varying rules on who is allowed to open and access the account. But China has simplified the Foreign Currency Capital Account, which allows many middle-market companies to better structure their treasury management in China. For instance, firms no longer need pre-approval by the government, and they can open multiple and cross-city capital accounts. In another important shift, companies can make changes to tax certificate requirements following the payment of receivables, providing greater flexibility for accounts payable management.

Managing treasury operations in China can still be a challenge, though. The country’s vastness means one U.S. company may be working with 20 different banks. One strategy for effective cash management is to sweep all the accounts in China every day, allowing treasury staffers to better manage the currency and keep track of cash positions. For example, in 2009 industrial technology firm Kennametal needed a cash-flow solution for its six distinct operations, because the Chinese government prohibited intercompany lending. Kennametal structured a cash pool liquidity structure that allowed it deploy surplus cash to overdraft entities. This structure increased efficiency and provided greater control over group cash balances.

China’s current five-year plan calls for greater reliance on domestic demand, a shift that could spur growth in many sectors that cater to consumers and provide opportunities for more companies. In addition, more than half of the country’s population now lives in urban areas, a transition that could benefit industries such as transportation and communications, housing and utilities, and personal products. As the standard of living on mainland China continues to improve, Chinese consumers are also increasingly buying high-end brands, eating out and traveling — a potential boon to the hospitality industry. 

U.S.-based middle market companies are poised to take advantage of many of those opportunities now that some of the regulatory obstacles have been cleared away. They just have to remember that treasury expertise in China doesn’t come overnight.

Mark Perry is the global commercial banking executive for the western U.S. at Bank of America Merrill Lynch.

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