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Treasury and Payments

How to Optimize Cross-Border Liquidity Management in China

Regulations across Chinese markets continue to evolve, paving the way for new treasury innovation. Now, global corporations have the opportunity to transform the way cash is managed through centralization, flexibility and automation.

Staging the journey

With multinational corporates (MNCs) continuing to generate strong cash flows from China operations, the need for proper liquidity solutioning has never been greater—particularly for companies with multiple locally established entities in various stages of the enterprise life cycle. It has become mission-critical for these companies to achieve full cash visibility by centralizing domestic balances.

Domestic liquidity structures within China have been the de-facto option to achieve this, ranging from manual bilateral entrustment loan arrangements to fully automated multilateral cash sweep schemes.

With multinational corporates continuing to generate strong cash flows from China operations, the need for proper liquidity solutioning has never been greater.

As China’s cross-border liberalization continues, the advancement of sweeping mechanisms has given treasurers flexibility to respond to changing needs and unique business models. This is evidenced in the evolution and acceptance of Dynamic Sequence Structures. Additionally, as policy has gradually relaxed, China-domiciled entities have become eligible to participate in cross-border liquidity structures, allowing idle cash balances to join global cash pools to facilitate overseas funding requirements.


China’s liquidity evolution: Sweeping mechanisms

Preparing for a successful implementation

MNCs should plan at least a year in advance in order to identify new liquidity models and what financial, legal and IT upgrades may be necessary. During this process, consider how you will:

Depending on the options, scope and complexity of the cross-border liquidity model you choose, it usually takes three to six months from planning to implementation, including China’s regulatory approval process. The timeline will also depend on whether your company already benefits from the experience of an established liquidity structure elsewhere in the group.


Navigating the regulatory landscape

There are currently two governing bodies that monitor cross-border physical cash pooling in China. PBOC (People’s bank of China) manages the CNY cross-border scheme and SAFE (State Administration of Foreign Exchange) manages a separate multi-currency scheme that includes FCY and CNY.

The two governing bodies have set forth specific criteria and eligibility standards for pool participants and it’s on a case-by-case pre-regulatory approval and filing basis to set up the cash pool subject to applicable regulations, excluding the Shanghai Free trade zone scheme.

China has been gradually easing controls on capital accounts to incentivize multinational corporations to invest in local business and take local firms global. In and outbound capital flow rules have been relaxed, creating opportunities for businesses to utilize working capital more efficiently in ways which were previously inaccessible.

But as all things ebb and flow, rules and conditions are constantly evolving.


Getting the execution right

Perhaps nothing is as important than picking an experienced transaction bank with a track record of navigating the market. Recently, a leading chemical company was seeking innovative and cost-effective solutions to help them manage their resources to promote efficiency in their crop yield and quality control processes. The client’s Asia Pacific operations spanned across 14 markets and contributed 25 percent of global revenue. The client’s objectives were to:

  • Mobilize CNY liquidity between China and global regions and minimize FX costs currently incurred
  • Centralize liquidity to maximize yield with intercompany reporting to track positions
  • Implement a flexible solution that allows for additional entities to participate in the future

In collaboration with J.P. Morgan, the client implemented a structure that only required one China onshore entity to participate in a CNY cross-border pool (typical engagements require a domestic cash pool to have a minimum of two entities).

The client was able to mobilize trapped cash with only one onshore entity with the flexibility to effectively fund two offshore entities. Idle balances were released in participating countries through Singapore to fund regional working capital needs. The client was additionally able to minimize FX conversion costs and offset short positions by leveraging an aggregate pool balance.


Looking ahead

As the Chinese market continues to liberalize and new treasury innovations become increasingly accessible and accepted, the way cash is managed is set to undergo a dramatic transformation. Centralization, flexibility and automation are top-of-mind for corporate treasurers doing business in China now more than ever. The evolution and proliferation of sweeping mechanisms and digitalization of transactions is just the beginning. The adoption of real-time-payments is accelerating treasurers towards a cohesive “real-time treasury” mindset and the toolbox to match.

This calls for the right transaction banking relationship—one that builds on the modern treasurer’s mandate with a digitally-driven, human-first approach.

This calls for the right transaction banking relationship—one that builds on the modern treasurer’s mandate with a digitally-driven, human-first approach. We are proud to continue to support our global multinational clients with their global liquidity needs through thoughtful expertise, detailed knowledge of the landscape, and ideas to help them win.

To learn more about our growing suite of solutions for your cross-border liquidity challenges, please contact your J.P. Morgan representative.


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