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3 Steps to Establish Effective Cross-Border Liquidity Management in China

China has been challenging terrain for cross-border liquidity management for all but the biggest companies. But new approaches and solutions are emerging for multinationals of all sizes.

China’s evolving regulations and sheer size, along with a changing global trade picture can make cross-border liquidity management difficult, especially for smaller multinational corporations (MNCs).

New, more efficient models are emerging that can help global companies of all sizes mobilize their cash in China. Follow these steps to find and implement the best cross-border liquidity model for your MNC.


1. Evaluate Chinese Liquidity Structures

MNCs with multiple locally established entities in China may have different group entities at different stages of the enterprise life cycle. For example, one division may need cash while another needs to optimize idle cash on hand.

To address these differences, corporate treasurers should begin by evaluating the available liquidity structures within China. Options range from a manual bilateral entrustment loan to a fully automated multilateral cash sweeping system.

Domestic cash sweeping stems from the entrustment loan framework and works much like traditional zero-balancing structures in overseas markets. 

Traditional zero-balancing structures, such as sweep as required, are the prevailing mechanism for domestic cash sweeps. Over the past decade, new customized sweeping mechanisms have emerged to meet liquidity management needs in China. Gradual policy relaxation has allowed these models to operate with Chinese entities under regulatory approvals.

These new models help put idle cash balances from China-domiciled entities to work, allowing MNCs to fully incorporate these operations into their global cash pooling systems and improve overall overseas funding needs.


2. Find the Best Solution for Your Company

MNCs should plan at least a year in advance to identify new liquidity models and necessary financial, legal and IT upgrades. During this process, consider your:

  • Business objectives: CFOs should make the business objectives of establishing cross-border liquidity structures clear from the start. For example, many MNCs set up cross-border liquidity structures to meet business centralization goals. 
  • Team’s readiness: A dedicated team of treasury personnel may be necessary to implement a full analysis of your needs, solutions and implementation. Tax, legal and regulatory advisors should also be on board.
  • Business resiliency plan: COVID-19 has highlighted the need for enterprise-wide disaster planning and fraud prevention. Work with your risk management team to create your business resiliency plan.
  • Internal and external expertise: China’s size and evolving role in global commerce requires planners with expertise on the ground. Look to internal talent and qualified external advisors to build successful domestic liquidity structures in China that can further expand into cross-border cash pooling.
  • Automation: Digital payments are moving faster than ever as a result of the pandemic and emerging markets’ embrace of paperless processes. Payment innovation is changing how business is conducted in China and will ultimately influence how cash is deployed. The evolution of real-time payments is pushing treasurers around the globe to adopt new systems with access to instant data that can take immediate action. Think about how your liquidity structure can benefit from these future solutions.
  • Pool header location: This strategic decision involves the selection of the currency (yuan or other foreign currency), based on its liquidity condition, the regional center location of the pool header and all tax, regulatory and operating requirements.


3. Prepare for Implementation

Depending on the options, scope and complexity of your cross-border liquidity model, it usually takes a few months to implement, including China’s regulatory approval/filing process. The timeline will also depend on whether your company has established a liquidity structure elsewhere in the group.

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