Financial Risk Manager Designation

China took another step toward liberalizing its financial regulations last fall by establishing the Shanghai Free Trade Zone, which now serves as a laboratory for trying out new rules and regulations for doing business in China.

Chinese regulators have proposed regulatory changes within the zone affecting everything from the interest rate paid on deposits to customs processes and cross-border pooling.

The free trade zone in Shanghai “will be a testing ground for all future reform in China, ” said Debra Lodge, a managing director and head of renminbi (RMB) business development for HSBC North America. “In 2014, we are expecting a lot of change, additional new pilots and just easier processes for multinationals to do business.”

While rules for companies operating within the zone require further clarification from Chinese regulators, Lodge said that she expects to see “a much more open investment environment.”

She cited, for example, the fact that within the Shanghai Free Trade Zone, there is no longer a cap on the interest rates paid on foreign-currency deposits of less than $3 million. “The market was hoping for the same on RMB deposits, but that has not happened yet, ” she said.

In another development, companies doing business within the free trade zone no longer have to get approval from the State Administration of Foreign Exchange to convert U.S. dollars into RMB in order, say, to build a factory. “Your capital account in U.S. dollars has been freed up, and you can convert that to RMB at will for appropriate transactions, ” Lodge said.

The ceiling on the total capital that one business unit can loan to another unit of their company located outside of China was boosted to 50% for those operating in the free trade zone, from the 30% ceiling imposed on companies in the rest of China.

And in a development of particular interest to corporate treasuries, China has made cash pooling easier. Companies can use an RMB-denominated intragroup cross-border sweep to connect funds held within China, but outside of the free trade zone, with a global cash pool that their company operates outside of China via a designated account within the zone.

“This is going to give multinationals with a lot of currency movement and an existing cash pool the ability to incorporate their Chinese entities into the global cash pool, ” said Lodge, pictured at left.

The changes being piloted in the free trade zone touch on many aspects of doing business in China. For example, customs processes are being streamlined and electronic filing introduced. Employees of companies operating in the free trade zone may remit their entire salary outside of China, while workers in the rest of China are limited to sending a maximum of $50, 000 a year out of the country.