An American MNC that specializes in global manufacturing and technology was able to obtain a Rmb3.3 billion ($530.1 million) cross-border lending quota from the PBoC Shanghai branch, according to Standard Chartered. That is part of a pilot programme that supports foreign and local MNCs that have plans to channel surplus renminbi capital in mainland China to fund their renminbi-denominated activities overseas.
“It enables MNCs to effectively move liquidity from onshore to offshore and use that liquidity within their regional treasury centres – either to pay invoices or participate in global pooling arrangements,” says Michael Vrontamitis, regional head of product management for northeast Asia at Standard Chartered.
This scheme has transformed the lending of renminbi between companies from one based on a traditional entrustment loan – with banks as intermediary agents and the movement of funds solely restricted to onshore – to one where two parties within the group sign lending agreements directly based on negotiated interest rates and manage the cross-border loan drawdown subject to the one-year cap.
Corporates – which are required to identify subsidiaries that will be allowed to transact in this intercompany loan structure – will be able to sweep their excess renminbi offshore on a daily, monthly or annual basis, depending on their needs and ability to forecast cash flows.
For example, a subsidiary in China will have the option to lend directly to their regional treasury centres, other related subsidiaries or even its parent company that are facing a shortage of cash. Banks will merely help facilitate the transaction and will have no say in the interest-rate negotiation process.
This set up is different from before, as corporates were not allowed to engage in cross-border intercompany lending.
“Previously, corporates would have to make a dividend payment to take liquidity out of China, so there are times there’s a lot of pocket of cash sitting in China and they can’t make use of it,” says a Hong Kong-based head of global transaction services at a foreign bank. “In this particular case, it will allow them to make use of the cash from China, so that is definitely good news from an MNC’s point of view.”
The issuance of the quota is assessed on a case-by-case basis and is subject to the size of a corporate’s renminbi pool, plus its overall financial performance. Companies that have established comprehensive regional treasury centres are likely to be ideal candidates for this programme.
“If you are a Fortune 500 company, you are more likely to be seen as a company that is going to be managing liquidity in an appropriate way,” says a Hong Kong-based head of product for transaction banking at a British bank. “Most of the companies that are expected to go through this scheme will have treasury policies in place – they are specific in what they can or can’t do with funds through cross-border lending.”
Before this pilot programme was available, there was another alternative in which foreign institutions could use their idle renminbi by pledging the Chinese currency with a bank in China as collateral and obtaining a working capital loan from the bank’s overseas branch. This helps ease a corporate’s funding issues to a certain extent outside of the mainland.
With the emergence of the new PBoC initiative, this will have a positive impact on a corporate’s cost of financing.
“Since renminbi cross-border lending is doable, it will make whole structure more straightforward,” says a China-based cash management expert at a British bank. “The all-in cost of new structure will be significantly reduced.”
In addition to helping MNCs manage and improve their day-to-day cash flows, this pilot programme is expected to improve offshore renminbi liquidity. Corporates with excess trapped liquidity in China will have the flexibility to either use or convert the funds in any location.
“The Hong Kong CNH deposit base has not been growing that much, even though there’s more trade flows because there are flows both in and out,” says the head of global transaction services. “Now the PBoC has allowed an additional channel where more funds can flow out. This will help offshore renminbi liquidity a lot.”
This development is also anticipated to boost the pace of renminbi redenomination in global trade.
“This is very positive because it gives it another reason why the renminbi is just another currency and if you are dealing with China, why you should take control of managing your renminbi FX risks as oppose to delegating that to an entity in the mainland,” says Vrontamitis.
While renminbi trade redenomination in recent months has tapered off due to increasing market uncertainty and faltering trade numbers between China and other countries, London has continued to expand its influence as an offshore renminbi hub.
In October, renminbi-denominated payments in the UK rose by 3.9%, while the others declined, with Singapore dropping by 22.7%, according to a Swift report on Monday. Institutional transfers, as opposed to trade settlement, are driving the adoption of the renminbi, representing 98% of the total payments value for UK and 94% for Singapore in October 2012.
Moreover, October was the second consecutive month there was a decline in renminbi payments, leading to a demotion of the currency to 16th from 14th place in September in the world currency payment table, adds Swift.