A brief introduction to China’s cash pooling regime

David Wang and Jackie ChenMonday 12 July 2021

David Wang
Zhong Lun, Shanghai
davidwang@zhonglun.com

Jackie Chen
Zhong Lun, Shanghai
chenchun@zhonglun.com

Under the current Chinese foreign exchange control policies, multinational companies (MNCs) are always worried about how to efficiently centralise and manage their funds within and outside China. In fact, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have released a series of pilot policies and regulations of cross-border cash pooling for MNCs, which enable them to better centralise and manage their fund and reduce their financing costs. This article serves as a brief introduction to the current Chinese cash pooling regime, which may help to address certain MNCs’ concerns about their global fund management.

Classification of Chinese cash pooling and key differences

There are two parallel legal regimes governing cross-border cash pooling in China: multi-currency cash pooling regulated by the SAFE (‘multi-currency cash pooling’) and nationwide RMB cash pooling regulated by the PBOC (‘RMB cash pooling’). In principle, one MNC can only establish one RMB cash pooling and one multi-currency cash pooling. The key differences between these two regimes are outlined in Table 1.

Multi-currency cash pooling

RMB cash pooling

Currency

Multi-currency (including both RMB and foreign currencies).

Only RMB.

Financial criteria

The total scale of RMB and foreign currencies flow of all domestic member companies exceeded US$100m in the prior year.

  • The domestic and overseas member enterprises have been operative for more than one year.
  • The total business income of the domestic member enterprises in the prior year was no less than RMB1bn.
  • The total business income of the overseas member enterprises in the prior year was no less than RMB200m.

Pool header

The pool header of the MNCs must be a domestic company.

MNCs may designate either a domestic or an overseas member enterprise to be the pool header.

Limitation on net inflow amount

Σ (The audited ownership interest of the pool header and the domestic member enterprises at the end of the last year * 2)

(Domestic member enterprises’ ownership interest * MNCs’ shareholding ratio) * 0.5.

Limitation on net outflow amount

Σ (The audited ownership interest of the pool header and the domestic member enterprises at the end of the last year * 0.3).

Not mentioned (in practice the net outflow amount is controlled by the PBOC).

Forbidden fund use

Not mentioned (in practice the SAFE adopts a similar standard to the PBOC).

The fund shall not be invested in securities, financial derivates and real estate that is not for own use. It shall not be used to purchase wealth management products or for disbursement of entrusted loans to non-member enterprises.

Settling bank

The pool header may select one cooperation bank in the province where the pool header is located.

The pool header may select one to three banks with international settlement capacity.

Filing requirement

The pool header shall file the multi-currency cash pooling with the local branch of the SAFE.

The settling bank shall file the RMB cash pooling with the local branch of the PBOC.

Table 1: key differences between multi-currency cash pooling and RMB cash pooling.

Special cash pooling in Free Trade Zones

Special cash pooling is available in different Free Trade Zones in China (eg, Shanghai, Tianjin), which, subject to the local regulations, can be more flexible compared with the normal cash pooling regime outside the Free Trade Zones in terms of the requirements on the member enterprises, quotas, etc.

MNCs may choose to establish either RMB cash pooling or multi-currency cash pooling (or both) in the Free Trade Zone to enjoy the local Free Trade Zone flexibility. Yet, in order to be eligible for the special cash pooling regime in the Free Trade Zones, the MNCs shall first set up a company in the Free Trade Zone as the pool header.

Account management and tax implications

In practice, the pool header will open a domestic master account while the member enterprises will open sub-accounts. All cross-border fund flows under the cash pooling are channelled via the master account. Please note that if a MNC prefers to maintain a separate account for pooling the funds of its overseas member enterprises, it may designate an overseas member to open an Non-Resident Account (NRA) with a Chinese bank for such purpose.

The MNCs shall also be vigilant about the tax implications in connection with the cash pooling (eg, VAT incurred with the interest, stamp duty). We suggest consulting a tax adviser in advance when establishing the cash pooling.​​​​​​​

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