China’s Regulation On Cross-Border Cash Pooling

作者：植德金融部

1. Cash Pooling - the Concept and Regulatory Background 

Cash pooling is a cash management technique created by multinational companies ("MNC") and their banks.  Its purpose is the optimization and use of surplus funds of all companies in a group in order to reduce externaldebt and increase the available liquidity. There is no legal obstacle for cash pooling when all entities are in China. However, when cash pooling business involves entities located in different countries, relevant regulatory requirements of foreign exchange will apply.

Cross border cash pooling started as a pilot program for some selected enterprises in Beijing Shanghai and some other cities in 2012. In 2014, the State Administration of Foreign Exchange ("SAFE") issued the Regulations on the Centralized Operation and Management of Cross-border Funds of Multinational Corporations (Huifa [2019] No.7), allowing MNC to conduct cross-border foreign exchange cash pooling nationwide. In March 2019, SAFE issued the revised Regulations on the Centralized Operation and Management of Cross-border Funds of Multinational Corporations (Huifa [2019] No.7) (hereinafter referred to as the "Regulations on FX Cash Pooling") to further facilitate MNC in the foreign exchange cash pooling.

Cross-border RMB cash pooling was first piloted in Shanghai Free Trade Zone. In November 2014, the People’s Bank of China ("PBOC") issued the Circular on Issues Related to Multinational Enterprise Groups’ Centralized Operation of Cross-border RMB Funds, which cross-border RMB cash pool business will be expanded nationwide in pilot sectors. In 2015, PBOC issued the Circular on Further Facilitating Multinational Enterprise Groups to Develop Two-way Cross-border RMB Cash Pooling Business (Yinfa [2015] No.279) (hereinafter referred to as the "Regulations on RMB Cash Pooling").

In March 2021, PBOC and SAFE jointly issued the Circular on Further Facilitating the Coordinated Use of Multinational Corporations’ Cross-border Funds, and decided to carry out the first batch of pilot projects of consolidated RMB and foreign currency cash pooling of MNC in Shenzhen and Beijing. In July 2022, PBOC and SAFE decided to launch the second batch of pilot projects, further optimizing management policies and facilitating the coordinated use of cross-border funds of MNC. The main policies include: increasing the number of pilot areas and corporations; allowing MNC to handle the centralized collection and payment of RMB and foreign currencies of its overseas member enterprises in China; and further facilitating MNC on cross-border RMB revenue and expenditure.

2. Main Functions of Cross-Border Cash Pooling

Cross-border cash pooling operates in the concept of "centralized operation of funds", which mainly includes the following two functions:

• adjustment and collection of cross-border surplus and deficiency of funds between domestic and foreign members of a MNC group, involving the centralized management of foreign debts and overseas lending.

  
  

• Cross-border centralized collection and payment under current account, that is, a MNC group carry out centralized collection and payment, net balance settlement and other relevant business for cross-border collection and payment under current account among domestic and foreign members of the MNC group.

Functions of cash pooling in China are largely the same as those in the international market. There are a main account and several sub-accounts, which will be used for deposit, debit, overdraft, active disbursement and collection of funds. It will be automatic transfer which usually occurs at the end of the day, and the amount of transfer depends on the designated day-end balance amount and target amount.

3. Who are Eligible to Participate in Cross-Border Cash Pooling

At present, cross-border cash pooling in China is limited to MNCs, which is defined as a group consists of parent companies, subsidiaries and other member enterprises or institutions linked by capital. Regulations on RMB Cash Pooling further clarify that an MNC includes the parent company and the subsidiaries in which the parent company hold more than 51% stake ("holding subsidiaries"); companies in which the parent companies and holding subsidiaries solely or jointly hold more than 20% shares, or less than 20% shares but being the largest shareholder. Financial institutions (except for finance companies acting as lead enterprises), local government financing platforms, and real estate companies are not allowed to participate in the cash pooling.

Different requirements have been set for enterprises participating in RMB and foreign cash pooling business. Any member of an MNC engaging in the cross-border RMB cash pooling shall have carried out the business operation for more than 1 year and meet the following conditions:

• The domestic member enterprise is not a financing platform of local governments, does not belong to the real estate sector, or has not been included in the list of enterprises subject to special supervision over RMB settlement in goods export trade;

• The aggregate operation revenue of domestic member enterprises for the past year shall be no less than RMB 1 billion; and 

• The aggregate operation revenue of overseas member enterprises for the past year is no less than RMB 200 million.

Regulations on FX Cash Pooling stipulate that an MNC engaged in cross-border foreign exchange cash pooling need to have real business needs, have a sound cross-border fund management structure and internal control system, have established the corresponding electronic internal management  system, and meet the following conditions:

• The foreign exchange receipts and payments for the past year exceeded USD 100 million (on a consolidated basis of all domestic member enterprises participating in the centralized cross-border fund operation); 

• No material foreign exchange violations in the past three years (enterprises established less than three years have no material foreign exchange violations since the date of establishment);and

• Classified as Class A in trade of goods.[1]

4. Quota Management

As capital account has not yet fully opened in China, cash pooling is subject to quota restrictions, which includes the external debt quota (borrowing by a domestic company from overseas lenders) and overseas lending quota(lending by a domestic company to overseas borrowers).

4.1 External debt quota

The lead enterprise of an MNC may consolidate all the external debt quotas of the MNC’s domestic member enterprises based on the following formula:

An MNC’s Consolidated External Debt Quota ≤Σ Unaudited Owner’s Equity at the End of Last Year of the Lead Enterprises and the Domestic Member Enterprises Participating in the Consolidation × Cross-Border Financing Leverage Ratio × Macro-Prudential Adjustment Parameter.

The initial cross-border financing leverage ratio is 2, and the initial macro-prudential adjustment parameter is 1. SAFE may adjust the cross-border financing leverage ratio and the macro-prudential adjustment parameter based on the overall status of external debts, the term structure, currency structure, etc.

A member enterprise that participates in the cash pooling and the consolidation of external debt quotas of the MNC, is, in principle, not allowed to borrow external debts on its own from the date when the head enterprise submits the application for the consolidation. If the member enterprise has borrowed external debts by itself before the application, it is, in principle, not allowed to participate in the consolidation of foreign debt quotas as a member enterprise until the foreign debts it borrowed are paid off.

The two-way Cross-border RMB Cash Pooling of an MNC is subject to upper-limit management. The upper limit of cross-border net inflow of RMB funds = accrued owner’s equity in the fund pool × macro-prudential policy parameter. The macro-prudential policy parameter is 0.5, and the head office of PBOC may make dynamic adjustments according to the macroeconomic situation and the need for credit control. The settlement bank and the lead enterprise shall be responsible for the quota compliance, and make sure the net inflow does not exceed the upper limit at any time.

4.2 Overseas Lending Quota

The lead enterprise of an MNC may consolidate all the overseas lending quotas of the MNC’s domestic member enterprises using the following formula:

An MNC’s Consolidated External Loan Quota ≤Σ Unaudited Owner’s Equity at the End of Last Year of the Lead Enterprises and the Domestic Member Enterprises Participating in the Consolidation ×Overseas Lending Leverage Ratio × Macro-Prudential Adjustment Parameter. 

The initial overseas lending leverage ratio is 0.3, and the initial macro-prudential adjustment parameter is 1. SAFE may adjust the overseas lending leverage ratio and the macro-prudential adjustment parameter based on the overall status of external loans, the term structure, currency structure, etc.

A member enterprise that participates in the cash pooling is, in principle, not allowed to provide overseas lending on its own from the date when the pool header submits the application for the consolidation. If the member enterprise has provided overseas lending by itself before the application, it is, in principle, not allowed to participate in the consolidation of overseas lending quotas as a member enterprise until the external loans issued by it are paid off.

5. Other Requirements for Cash Pooling

Cash Pooling is subject to other requirements in respect of the opening of the master accounts, sources of funds, use of proceeds, contract arrangements, etc.

5.1 Master Account

The lead enterprise of an MNC may, after obtaining the cash pooling registration notice, directly open a domestic master account with the bank to handle business relating to the centralized operation of cross-border funds. An MNC may, according to its business needs, select an offshore member enterprise to open an NRA account in the bank for the centralized operation and management of the funds of overseas member enterprises. The domestic master account can be a multi-currency (including RMB) account, and there is no limit on number of the account, provided that prudential regulatory requirements are satisfied; overdraft is allowed in the domestic master account; the overdraft funds can only be used for external payment, and shall be repaid in priority after receiving the funds.

According to Regulations on RMB Cash Pooling, in principle, an MNC can only set up one RMB master account, i.e., the lead enterprise may apply to open an RMB special deposit account. Where there is a genuine need to establish multiple master accounts and form multiple capital pools, the MNC shall file with the head office of PBOC, and a domestic member enterprise may join the account only once.

5.2 Sources of Funds to be received in the master account

The Regulations on FX Cash Pooling list the sources of funds that can be received in the domestic master foreign exchange account, which includes: income under current account directly obtained by domestic member enterprise from overseas; funds transfer from the current accounts, capital accounts, asset selling proceeds accounts, and special domestic reinvestment account of domestic member companies; external debts borrowed from overseas within the consolidated quota, and the principal and interest of overseas lending within the consolidated quota; deposit of foreign exchange purchase (funds obtained from foreign exchange purchases for outbound payments under current account, overseas lending, or repayment of external debts); the principal and interest of deposits; funds transfer from other domestic master accounts of the same lead enterprise. Except for the above, other fund to be received in the master account shall be approved by SAFE. Unless otherwise stipulated, external foreign exchange loans borrowed from domestic depository financial institutions by domestic member companies of an MNC shall not transfer into the domestic master account for the MNC except for the purposes such as repayment of external debts or external loans.

There is no such requirement on the source of funds for RMB cash pooling under the Regulations on RMB Cash Pooling.

5.3 Limitation on the Use of Proceeds

Funds in the master account can be used for the following purposes: external payments made by domestic member enterprises under current account; funds transfer to the current accounts, capital accounts, assets realization accounts, and special reinvestment account of domestic member enterprises; overseas loans to be provided within the consolidated quota, and the principal and interest of external debts repaid that were borrowed within the consolidated quota; foreign exchange settlement; outgoing transfers of deposits; payment of deposit reserves; transfer expenditure of domestic master accounts of the same lead enterprise. Other purpose shall be approved by SAFE.

Foreign exchange settlement under current account, direct investment, external debts and overseas lending can be made in a consolidated basis in the master account. Foreign exchange income received in the master (including foreign exchange and RMB funds converted from foreign exchange) can be used by the domestic company with an undertaking of true and complying transaction without the need to provide authenticity proof materials case by case in advance.

In addition, Regulations on RMB Cash Pooling prohibits use of the funds for the following purposes: investment in securities and derivative products; entrusted loans to non-member enterprises; purchase wealth management products and non-self-use real estate.

[1]  As per the Guidelines for Foreign Exchange Administration for Goods Trade, SAFE classifies enterprises into Class A, B and C on the basis of the off-site or on-site verification results and in light of the enterprises’ compliance with foreign exchange regulations and other circumstances.

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