COMPLEXCOUNTRIES
Global Treasury intelligence
Cash pooling in China
Cash pooling in China
Call date: 25th June 2020
In this call, treasurers from Asia and EU shared their experiences with domestic and cross-border pooling in China. This report covers : Domestic pooling, Cross border pooling, Interest rates & tax, SAFE & PBOC approvals , Entrustment loan fees, Fund flows & Banks
The call was chaired by Damian Glendinning, whose commentary appears below.
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Chairman’s commentary
As usual with China, a lively discussion with many interesting experiences. Also as usual with China, people are receiving different advice, and there does not seem to be a single rule book to follow.
Nearly everyone on the call is running both a domestic and an international cash pool, and some are running USD as well as CNY pools within the country.
Chair’s commentary
- In some cases, the domestic pool is zero balance to a header account. In others, it sweeps cash directly between the entities to eliminate overdrawn positions.
- In all cases, the process for obtaining SAFE and PBOC approval for cross border sweeping is long and tedious – but approval ends up being granted.
- The conditions for the approval have tended to vary over time: those who got their sweeping licences first tend not to have quotas or restrictions – these are being faced by latecomers.
- In the past, cross border sweeping has been suspended in times of pressure on the RMB, and then re-instated once the pressure eased.
- Loans between Chinese entities have to go through a bank. This is called an entrustment loan, and has been reduced to a simple document provided by the bank to cover each loan which happens during a sweep. Participants are comfortable they have negotiated the fees for this document down to an acceptable level.
- Tax remains an area where there is very little clarity:
- Tax advisors recommend any loans made under pooling arrangements do not exceed twice the paid in capital of the borrowing entity, as this will likely violate thin capitalisation rules. However, neither PBOC nor SAFE ever bring this up.
- The rates charged for intercompany loans inevitably raise transfer pricing issues. This is especially true for cross border transactions, but, in China, it can even apply to domestic transactions, if the two entities are in different provinces and come under different tax bureaux. No participant has ever been challenged by a tax bureau on this, and the actual pricing mechanisms used vary considerably.
- Most participants tend to use international banks, especially for the cross border pooling. This can create tension with the local teams.
- Most cross border pooling is now being done via the Shanghai Free Trade Zone.
- There has been pressure in the past from the authorities to make sure the flow of funds under cross border pooling goes both ways. Again, the experience has not been consistent. One participant found it was it took two days to send CNY from Europe to China – this was a problem for efficient pooling.
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