Recent Setback on the RMB Cash Pooling Business

It has been reported that in a meeting held on 18 January 2016, the People's Bank of China (the “PBOC”) has instructed banks that provide multinational corporations with RMB cash pooling services to take measures to monitor and regulate the outflows of money from Mainland China.

Background

The RMB cash pooling refers to a framework for centralising and allocating funds between the accounts of group companies which have operations both inside and outside Mainland China. Under such regime, the multinational corporations which have applied for RMB cash pooling business could move RMB across borders among their invested companies and affiliates with relative ease of restriction. The development of RMB cash pooling business was once seen as a big step forward for the internationalization of RMB.  It was firstly piloted in the Shanghai Free Trade Zone in early 2014 under the Circular on Supporting the Expansion of RMB Cross-border Business in China (Shanghai) Pilot Free Trade Zone (Circular 22), and was subsequently expanded into nationwide according to the release of the Circular Regarding Matters Relating to the Expansion of Centralized Cross-border RMB Operations by Multinational Corporations (Circulars 324) on 1 November 2014. After that, the RMB cash pooling business has been further developed and more restrictions have been relaxed according to the release of the Notice of the People’s Bank of China on Further Facilitating Two-way Cross-border RMB Cash Pooling by Multinational Corporations (Circular 279) on 5 September 2015. For example, comparing with Circular 324, Circular 279 has raised the macro-prudential policy parameter used to calculate the cap on the net inflow of cross-border RMB capital from 0.1 to 0.5. The criteria for companies to be able to participate in RMB cash pooling business has also been lowered. From the above, in the context of the internationalization of RMB, the RMB cash pooling business has been in the progress of developing in the recent years.  

Latest Practice of RMB Cash Pooling Business

However, with the fears of a larger devaluation of RMB and the drop of the foreign exchange reserve, the Chinese government has recently attempted to tighten up the capital controls. Under the instructions given by PBOC in the meeting of 18 January 2016, banks providing RMB cash pooling services for multinational corporations shall limit outflows so that, at any time, there should not be any net remittance outflow of capital. In the event that there is a net outflow at the RMB cash pool, and a bank continues to effect any outbound remittance, the bank would be required to pay additional deposit reserve for 100% of the excessive amount. In a serious case, the bank may be disqualified from continuing the provision of the cash pooling services.  The previous RMB cash pooling regulations have only limited the net inflow of RMB from overseas, and as for the RMB outflow, there used to be no cap on it. The instruction of 18 January has, however, set a tone that China is limiting the outflow of RMB, and it is anticipated that companies may face more procedural requirements or restrictions if they want to remit money out of China.

Implications

For multinational corporations which have applied for RMB cash pooling services, it is worth noting that such new tightening of the policy on the RMB cash pooling business may create practical difficulties in remitting money out of Mainland China. It is not clear either, whether such a policy will affect the legitimate outbound investment, cross-border distribution of profits or repatriation of capital by foreign invested enterprises.  As the instruction was conveyed verbally in the meeting of PBOC, the implications of such a policy and whether such a policy will be written into any regulations are yet to be seen. We will keep a close eye on it and will keep clients informed of the changes if there is any update.