cash management solutions in the china market possibilities & best practice beijing - shanghai -...
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Cash Management Solutions in the China Market
Possibilities & Best Practice
Beijing - Shanghai - Guangzhou - Hong Kong- Shenyang – Chengdu - Wulumuqi
(8610) 8532-1919
(8610) 8532-1999
www.lehmanlaw.com
Contents
• The Collection Cycle - Tips and Best Practice
• The Payments Cycle - Tips and Best Practice
• Liquidity Management - Tips and Best Practice
The Collection Cycle
What Are Your Options For ETF Settlement in China?
A. PBOC China National Payments Network (CNAPS)
B. Settlement through traditional channel of local and/or foreign banks’ internal branch clearing networks
An Overview of CNAPs
The Collection Cycle
The only nationwide, independently run EFT clearing network in ChinaPoint-to-point direct transfers running on PBOC-maintained, reliable settlement system; over 20,000 direct clearing membersBased on SCB client experience, 80% of the transfers arrive within 24 hoursSame day arrival between CNAPS direct clearing memebersExtended network coverage based on all member banks’ geographic locationsOne standard remittance instruction for customer’s buyer to remit fund, ease customer sales office administrationNOTE: upgraded CNAPS to be introduced in 2003
The Collection Cycle
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PBOC CNAPS System: connectingall banks
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A - Payor account at local bank branch that is PBOC eLink member hub
B - Payor account at local bank branch that is not PBOC eLink member hub, I.e. sub-branch at remote area or small village
- Collection takes total 1.5 days up to longest 2 days
PBOC Settlement System
Member hub
Member hub(A) Same day transfer (T+0)
(B) Take 0.5 to 1 day
Member hub
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Foreignbanks
PBOCbranches
ICBC ABC BOC CCB ShareholdingBanks
CityCommercial
Banks
Rural CreditUnions
Policy Banks
‘Big 4’State-owned Banks
Minsheng
SPDB
Hua Xia
CN Everbright
Fujian Industrial
SZDB
CMB
GDB
CITIC
BOCOM.1727
3503
4102
1988
3743
1446
573
1687
684
PBOC CNAPS Member Hub Statistics
Summary of Traditional Channel - Routing Through Banks’ Internal Clearing Systems
The Collection Cycle
Historically, the key reason for delays in remittance process due to need to ‘settle’ between at least 2 banks internal clearing systemsLarge local banks nationwide internal branch clearing networks effectively operate as ‘separate national clearing networks’Currently, can consult with your Banking Partner on how to leverage on the local banks’ extensive network to your advantage
Tips for Best Practice in Routing Customer Payments
– Undertake a ‘PAYER BANK ANALYSIS’ with your Bank partner– Your Bank partner will help select a the payment route that will result
in the quickest settlement time– Your Bank partner will also assist in communicating any change in
payment routing to your customer base– This systematic approach to reviewing payer behavior will ensure that
your EFT collections are routed in the most efficient manner possible
The Collection Cycle
Issues Faced in Processing Payments - In Brief
How to facilitating payments processing via electronic banking platformsFacilitate remote authorizationSecure authorization environmentCentralized payables processing3rd party bank payments initiation
Trend toward establishing ‘shared service centres’ for payments processing for multiple legal entities in China
The Payments Cycle
Tips for Best Practice in Processing Payments
Choose a Bank partner in China to provide robust e-banking platform that accommodates:
Complex authorization matrix capabilitiesRemote payment authorizationChinese language capabilitiesAutomated reconciliation with internal AP system3rd party bank payment initiation
The Payments Cycle
The Payments Cycle
1. File downloadedfrom your A/P systemand sent to the bankfor processing.
2b. Direct credit posted tobeneficiary s a/cs thru ` PBOCclearing system andremittance advicefaxed to payee.
2b. Credit notes sent to localclearing and remittanceadvice faxed to beneficiaries.
3. Reconciliation file sentback to your office forautomated reconciliation.
2a. Payt via 3rd party bank -instructions sent to localbank to debit local bank a/c
2b. Client a/cswith foreignbank (SCB)
Banks
Liquidity Management
Corporate Structure Issues - Use of Holding Company as Re-Invoicing Centre
China Holding Company
Subsid A Subsid B Subsid C
3rd party customers
Inter-co sales -->
3rd party sales -->
Reinvoicing Centre Cont’dHolding company as distribution agent (MOFTEC approval required, K over RMB30 mio.)Distribution subsidiary, often with sales function. Can centralize collectionsRaise cheap funding through discounting commercial draftsCan iron out cash imbalances by offering preferential terms to factories in need, but amount and tenor restrictedTax impact - VAT and income tax
Liquidity Management
Reinvoicing Center
Re-invoicing centre
Factory B
Factory C
Factory A
Customers
Term payment
SuppliersTerm payment
Commercial draft
Pref. deposit
Credit line drawdown
Discounting without recourse
Advance payment
Banks
Liquidity Management
Sweeping TechniquesIn many cases, MNC will have multiple sales branches
scattered throughout China, collecting sales proceeds locally.
This results in numerous issues, including:idle balances left in branch accounts;delayed transit of funds to HQ ‘concentration account’manual compilation of bank account reports;management time/effort managing multiple bank
accounts with different banks;inadequate ‘central’ control over branch bank accounts
Liquidity Management
Sweeping TechniquesThese issues can be addressed via establishing a sweeping
structureBrief mechanics of this structure as follows:
All branch offices open collection accounts with one foreign bank.Where branch office is located outside permitted scope of foreign bank’s
RMB business, foreign bank arranges for branch to open collection accounts with partner local bank.
A minimum branch account threshold is set by HQ (could be zero balance), and foreign bank monitors balances on pre-set basis. Where funds in branch accounts exceed minimum amount, automatically swept to the HQ concentration account.
Comprehensive reporting on collections is provided for improved management information and control.
Liquidity Management
Pooling of Funds - Bilateral Entrustment Loans
Entrustment loans effectively allow inter-company financing activities by routing the transactions through a financial institution (as ‘entrustment loan agent’).
Bilateral entrustment loans are a simple and effective tool to use when group has:
one entity with consistent levels of surplus cash, and other entity(ies) that are borrowing from banks.
one entity with stable level of bank borrowings, and other entity(ies) with consistent levels of surplus cash
‘Bilateral’ means individual entrustment loans signed between the Corporate Lender and the Corporate Borrower for each entrustment loan transaction.
Cost/Benefit of a Bilateral Entrustment Loan
CostsStamp duty - 0.015% of principle amount Business tax on interest earned by cash surplus entities - 5% Trust loan fees
BenefitsImmediate reduction in loan interest paid to banks for working capital requirementsImprovement in yield on surplus cash for lending party
Liquidity Management
Pooling of Funds - “Virtual Pooling Structure”• When to use vs. bilateral entrustment loan?
• When group has BOTH multiple cash surplus and cash deficit entities spread around the country
• Benefits groups of companies with net working capital requirements• Reduces borrowing costs at individual and overall group level• Pockets of excess cash better remunerated at individual and group
level
Liquidity Management
Virtual Pooling - Implementation
• Participating entities and bank enter into master entrustment loan agreement
• Transfer funds from cash rich to cash poor entities through a designated Pool Header
• At any one time only the exact amount required can be borrowed by the operating entities from the Pool Header
• Pool Header enjoys beneficial conditions on credit line and more flexibility to invest excess cash
• Backstop line of credit provided to pool participants to ensure liquidity available at all times
Liquidity Management
Operating a Virtual Pool
Credit line drawdown (can be made interavailable to all participating entities)
Co 1 Co 2 Co 3 Co 4 Co 5
Cash > Threshold
Cash < ThresholdCash > Threshold
Trust loan drawdown
Trust loan + interest repayment
Trust loan drawdown
Trust loan + interest repayment
Cash < Threshold
Company 6 (pool header)
Pool managerBanks
Cost/Benefit of a Virtual Pool
Costs• Stamp duty - at least 0.015% of principle amount (assuming 3
parties to the entrustment loan agreement)• Business tax on interest earned by cash surplus entities - 5% • Trust loan fees• Arrangement fees• Individual drawdowns and repayments are exempted from
stamp dutyBenefits• Reduction in loan interest paid to banks for working capital
requirements
Liquidity Management