Date
15 December 2017
New rules will allow companies based in the Shanghai free trade zone to borrow offshore yuan. Photo: Bloomberg
New rules will allow companies based in the Shanghai free trade zone to borrow offshore yuan. Photo: Bloomberg

HK RMB options to flow from FTZ cash-pooling, loan rules

Official plans to allow cross-border borrowing and cash pooling in the Shanghai free trade zone (FTZ) will open up a new channel for renminbi from Hong Kong, Singapore-based DBS Bank said Thursday.

Ginger Cheng, DBS head of institutional banking for large Hong Kong and China companies, said the central government’s decision is expected to be a win for Hong Kong.

“In previous years, yuan capital has usually flowed out to Hong Kong but seldom the other way round, so the PBoC announcement is expected to create a win-win situation for Hong Kong as most renminbi in the city is idle,” Cheng said.

The decision by the central government is part of its overall push to expand financing support for cross-border investment and trade.

Under the plans, the Shanghai office of the People’s Bank of China (PBoC) will let companies based in the zone borrow offshore yuan, but those funds must be kept in a special settlement account opened at the bank located in the FTZ and can only be used for manufacturing operations and construction within the FTZ or overseas. They cannot be used for operations elsewhere on the mainland.

Large corporates will also be allowed to take part in two-way cash pooling in renminbi if they set up an entity in the FTZ. There will be no cap on cross-border borrowing and lending, but the cash flowing offshore will need to be generated from business operations, the central bank said.

“With two-way cross-border cash pooling, offshore yuan capital can return to the mainland. At the same time, the lending costs for the Chinese firms will be lowered if they choose to fund from Hong Kong banks [because the cost offshore is lower],” Cheng said.

The central bank’s decision comes just a month after the State Administration of Foreign Exchange announced that there will be no caps on foreign currency flows between international master accounts in the FTZ and the offshore market. That’s in contrast to the limits on flows in place between domestic master accounts and international ones.

Julien Martin, head of BNP Paribas’ renminbi competence center, told a derivatives forum Thursday that the official trend was towards fewer restrictions.

“We can see that the Chinese government is imposing less regulations and control processes but giving the Shanghai authorities the chance to decide — like a wish list for enterprises and authorities — to see what the market wants,” Martin said.

Thomas McMahon, director and chief executive of PACE, said the government is becoming “more comfortable with what can be taken off from the negative list in the zone”.

Banking on opportunity

Cheng said that for lenders, helping companies set up cross-border cash pooling will boost remittance fees. Interest income could also rise as banks lend capital laying idle in FTZ accounts.

DBS is already helping mainland firms make syndicated loans and Cheng expects more will look to Hong Kong for financing. That’s because these companies mostly borrow capital for mergers and acquisitions, which are expected to increase in coming years.

DBS is keen to see more policy easing, including looser rules on FTZ companies looking to list or issue debt in Hong Kong. But this might be a bit further down the track because it involves other regulatory bodies.

“It won’t be too long as the Shanghai zone is a testing ground and role model for other upcoming zones, but it’s hard to say whether we will see it coming out this year,” she said, adding that large companies are expected to use both debt issues and loans from commercial banks.

DBS Bank is among the first batch of lenders with approval to set up a branch in the Shanghai zone. And 20 to 30 percent of the bank’s lending is from the mainland.

– Contact the reporter at [email protected]

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    Ayishah Ma is a financial reporter on Greater China issues.

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