Latest PBoC pull-back a contrast to the reforms seen in 2015  

The decision by the Chinese regulators to ask banks to slow the operation of the two-way cross-border renminbi cash pools has caused a shudder to ripple across Western corporates, bankers say. But they also believe that the action is a temporary measure and unlikely to detract China from its long-term goal to allow the renminbi to form part of regional or global treasury liquidity structures.

Bankers who The Asset spoke with say the latest change, which was conveyed verbally, caught many by surprise in January. One banker in Singapore reckons that this possibly would be the first time since measures unveiled starting in 2009 that the authorities have taken a step back.

“It is a major speed bump in the short-term,” says one. “Until now, confidence in the internationalization of the renminbi was pretty solid going into November 2015 on the corporate side despite what happened in June (stockmarket correction) and August 2015 (renminbi depreciation).”

He also relates that with a lot of window guidance coming up, he has received queries from clients in Europe asking for greater clarity and the implications. “We are staying close to our clients and keeping them informed of the changes on a regular basis.”

So far, no official word on whether the action was in response to any particular concern the regulators may have. But it is not inconceivable that it may be related to recent volatile movements of the currency and the notable drop in the country’s overall foreign exchange reserves, which touched US$3.3 trillion at the end of 2015 from its peak of nearly US$4 trillion in the first quarter of 2014.

It was only in September 2015 when the People’s Bank of China, the central bank, relaxed further rules around cross-border renminbi cash pools. It raised the ceiling on the net inflow to 50% of the total shareholders’ equity in the cash pool from an initial ceiling of 10%. There was no cap on outflow.

The central bank also lowered criteria for companies to be able to participate in cash pools. Instead of three years, these companies are required to have been in operation for one year. Revenue requirements likewise were reduced. Multinationals can also choose up to three banks to perform the cash pool from one previously.

Under the latest window guidance, however, it is understood that cross-border activity would still be permitted so long as a corporate maintains a neutral position in terms of inflows and outflows. This means that total outflow cannot be greater than the flows into China. If that is the case, then the pooling would be suspended in both directions until a neutral position is achieved.

China introduced cash pooling on a pilot basis in the Shanghai Free Trade Zone in 2013 and subsequently expanded it into a nationwide scheme the following year. The launch of these cash pools was a breakthrough as it enabled corporates to move liquidity in and out of China and between group companies improving cash management efficiency and reducing financing costs.

Another banker suggests that given the slowdown in China, a number of companies are looking to redeploy their excess liquidity out of China and into activities overseas. This intention, however, could have broader implications for China given the recent fall in its FX reserves.

In a way, he believes, the regulators may be looking at how best to calibrate the use of the cross-border pool without causing problems of confidence.

“It is a pause for now given that there are bigger issues that the regulators are dealing with,” he adds.