Kicking off the conference’s final day, EuroFinance’s head of Editorial Asia Pacific, Shanghai-based Wu Chen, said he sees two megatrends in China. The first is the internationalisation of the renminbi (RMB), which has impacts on areas including liquidity management, funding, settlement and trade. The second, which is even more important, is that the changes in the country mean that treasury management in China can be incorporated into the bigger picture and companies can sweep cash from China into their global pools.
The RMB – A Growing Tool for Trade
Speaking to Chen’s first megatrend, a panel discussion then looked at how to use RMB for trade. As a framework, Lewis Sun, head of Sales at HSBC said RMB trading and FX volumes are picking up, with the RMB now used for 18% of trade volume in China that now exceeds US$4 trillion. The government’s intent is for the RMB to become a global currency and to be in countries’ reserve portfolios. Internationalisation has moved much faster than expected, he said, and there are now no transactions that can only be done in foreign currency. Key recent developments include the People’s Bank of China (PBOC) announcement of a new regulation allowing lending from onshore to offshore, which means the concept of trapped cash is no longer valid, and the establishment of the Shanghai Free Trade Zone (SFTZ) as a pilot for the government to try additional financial reforms.
Turning to the practicalities of how to use the RMB for trade, Stefan Harfich, head of Bank Relations at Siemens Financial Services said that about 10% of Siemens’ US$75bn in global turnover is business with China. Whether Siemens is building power plants or undertaking train projects, he said, the key issue for these long-term projects with costs in the billions was liquidity. Siemens decided two years ago that the time was right to start introducing RMB, with two key benefits being key factors in the decision. The first related to the operating businesses it serves, as using the RMB would result in cost savings, negotiation of discounts, rebates and easier access for customers to pay in RMB. And second, from a treasury perspective, there was pressure from the sixty-plus entities that Siemens has in China to get away from hedging and move purely to a Renminbi business.
Siemens started the shift to enable trade in RMB in the summer of 2012, Harfich said, and it took 16 months to complete the process of setting up trade settlement and invoicing with internal partners and external partners, changing to a CNH hedging regime, and establishing a payments factory. Harfich said some of the biggest challenges were how to overcome the constraint of the systems not being able to revalue to different currencies and how to meet auditors’ requirements for accounting for the more than 800 FX deals that moved to CNH. Siemens went live in October last year, he said, and has already broken RMB1bn in trade settlement. “All the benefits of a central treasury kicked in,” noted Harfich.
Jessie Li, Greater China Treasury Manager at Akzo Nobel said that the company, which focuses on very different business segments than Siemens, started using the RMB several years ago. Many of their sales or purchases are domestic and the company had a significant amount of RMB domestically. Unlike Siemens, however, they didn’t have a lot of intra-company transactions. The key exposure was dividends, which are paid by subsidiaries in China to overseas entities. Those subsidiaries worked with local banks, without a hedge, and Akzo Nobel found that local bank pricing to convert RMB to other currencies was costing the company about 400-500 basis points (BPs). Treasury submitted a proposal to change the dividend currency to RMB so that the company could enjoy the savings and more efficient hedging in China. “We did the analysis and identified the savings from dividend payments,” said Li. “There were a lot of savings.” When Siemens makes dividend payments and doesn’t have to convert RMB dollars, it saves at least 400 BPs.
Li said Akzo Nobel is waiting see how regulatory changes move forward after the outbound lending that PBOC has allowed since July last year, as outbound lending would benefit the company by enabling it to lend surplus cash outside China: “We really wanted to run a pilot first, to understand how it works for legal document preparation, how to settle the interest rate, how to follow transfer pricing, and how tax works.”
While completing the legal documents took some time, Akzo Nobel has moved forward. It is also now talking with its bank about auto-sweeping. “Our objective at this stage is to set up a scheme to make sure cash in China is no longer trapped, to make it available when it’s needed,” said Li. Azko Nobel does not want to go first when regulations change because an initial change may be followed by further changes. “We do a lot of evaluations, simulations, to evaluate scenarios and what benefits we can drive.”
What Li is looking at next is the cross-border structure for RMB. Harfich said that as China is liberalising rapidly, Siemens is looking at the potential for China-wide cash pooling.
Foreign Exchange and Interest Rate Risk
CME Group senior director Malcolm Baker said that the CNH (offshore RMB) market has now become the second, third or fourth largest currency traded globally, depending on what source is used, and he expects CNH to become the largest trading currency globally. With the market becoming so large, there are more hedging opportunities, and the dramatic shift from steady RMB appreciation to the more recent trend of depreciation has made this hedging even more important. What lies ahead, he said, are even more avenues for CNH hedging.
Taxes in China
Tax considerations were frequently mentioned during the day’s discussions, so it was beneficial to hear from Michael Velten, tax partner at Deloitte, on this subject. The starting point, he said, is that there is a relationship between regulatory change and tax: “Regulatory reforms allow things to happen, and then you look at the tax.” However, Velten added that tax changes in China are lagging the regulatory developments.
Cash repatriation from China has traditionally been limited and remitting cash has been burdensome, requiring significant documentation. One key development recently has been regulatory changes relating to outbound remittances, with changes in regulatory procedures for dividends and direct overseas lending as well as a relaxation of tax procedures. Since September 2013, companies have not been required to complete the tax clearance process before sending a remittance, which has led to companies being able to make payments far more quickly. A relaxation of regulatory procedures related to dividend distributions has also sped up remittances, and the changes mean that dividends can be paid right after the end of the fiscal year. Velten added that dividend distributions are not capped based on the most recent financial statements.
Direct overseas lending changes mean that companies can now lend to overseas affiliates. Depending on the terms of the loan, however, there is a question around characterisation of the loan as a dividend distribution, which could have tax consequences, and companies need to make sure they set up the terms of the loan carefully.
Transfer pricing is also a key issue and, as in other markets, transfer pricing requires the price to be the same as on an arm’s length basis when an offshore company has a loan from a Chinese company.
While there has been much interest in the SFTZ that was officially launched in September last year, the reforms are focused on trade, investment, administration and finance. It is a regulatory reform, Velten said, so there is no specific tax regime that applies to the SFTZ and there are very limited tax incentives: “The point is that for the activities the regulatory reform will encourage, there is no special tax treatment. There continues to be a lag between regulatory reform and tax rules that could apply.”
This session on the tax landscape in China rounded off EuroFinance’s annual conference in Asia for another year. It was an appropriate note on which to end as it provided practical and valuable insights. Each of the sessions generating questions from the audience about how to put the practices into action. While it is clear that there are challenges for corporate treasury departments of companies that have operations in China, there are also practical ways that treasurers can navigate these and help drive growth for their organisations.
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