The option of two-way cross-border RMB cash pooling, which had been available to entities established in the Shanghai Free Trade Zone for some time, was recently extended nationwide. The liberalisation of two-way RMB cash pooling is good news for multinationals doing business in China as well as Chinese companies investing overseas. Since local banks do not have much practical experience yet in setting up cash pools that comply with Chinese regulations, we recommend closely consulting with the People’s Bank of China and local commercial banks when setting up a cash pool.
On 1 November 2014, the People’s Bank of China released its long-awaited Notice of Relevant Issues on Conducting Centralized Management of RMB Cross-border Fund for Multinational Corporations. This Circular 324 provides detailed implementation rules for two-way cross-border RMB cash pooling by companies established throughout China. It is available nationwide, and the two-way cross-border RMB cash pooling is no longer a pilot scheme applicable only in the Shanghai Free Trade Zone (SFTZ). Before Circular 324 was introduced, companies established outside the SFTZ were only able to provide one-way RMB lending out of China to fund their overseas group companies.
Compared to the pilot scheme applicable in the SFTZ, Circular 324 provides a more comprehensive set of rules for two-way cross-border RMB cash pooling. Chinese domestic companies and overseas group companies that wish to participate in an RMB cash pool must meet certain criteria, including having been operational for more than three years. In addition, the total operating revenue of the domestic group companies in the previous year must be at least RMB 5 billion and the total operating revenue of the overseas group companies in the previous year must be at least RMB 1 billion.
Circular 324 sets a cap on the net cross-border RMB inflow at 10% of the total shareholders’ equity in the cash pool. The 10% cap is an initial ceiling and may be adjusted in the future depending on the economic situation in China and the need for controlling RMB inflow. There is currently no cap on the RMB outflow.
Circular 324 also provides restrictions on using funds in the RMB cash pool. These funds may not be used for certain specified financial activities.
Although some restrictions on inflow and outflow of RMB remain, the possibility to pool RMB cash reserves may provide significant benefits to multinationals. Multinationals can now include RMB cash reserves in their treasury management systems and explore ways to minimise the cost of funds flowing in and out of China. Due to the recent nature of Circular 324, we recommend that companies who are interested in setting up an RMB cash pool closely consult with the local People’s Bank of China and their local commercial bank.
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