Choosing the right financial strategy for your China business ventures
HKTDC 02-07 November 2005
Daniel Sale Associate Director, China International Business Development HSBC
Contents
Currency Capitalisation Liquidity
section one section two section three section four
Hedging
Currency
The Renminbi (RMB)
Prior to 21 July 2005
•
Effectively pegged against USD at 8.2767
On 22 July 2005
• •
Revalued by 2.11% Put on a managed float with reference to a basket of currencies
Now...
•
Traded within a band against
USD
•
Middle rate announced at the close of trading
Convertibility
Currency restrictions
•
Local Currency
– – – – – RMB is not a fully convertible currency, can only be traded in China Companies outside of China can not hold RMB accounts anywhere RMB interest rates are stipulated and fixed by PBOC (with a permissible margin to be set by individual banks) Restrictions on type, number and purpose of RMB accounts Restrictions on fund movement from corporate accounts to individual accounts, and from foreign currency accounts to local currency accounts
•
Foreign Currency
– – – – Foreign currency is under stringent control by SAFE (State Administration of Foreign Exchange) Restrictions on type, number and purpose of foreign currency accounts Restrictions on foreign currency movement both domestically and globally To move money out of China or convert it from RMB, local authority approval is required if it is not trade-related. If it is trade related, supporting documents have to be provided, such as invoices and bills of lading, for bank verification
Capitalisation
Company structures
FICEs Holdco RHQs
Vehicles
Holdco CJV WFOE EJV
Low cost
manufacturing
Franchising
FICLS
Trends
Export oriented JVs
Domestic Sales
Globalization
1979 Milestones
Open door policy EVJ law passed
1986
WFOEs permitted in certain industries
1988
CJV law passed
1995
Holdco regulations promulgated, CL S regulations also passed
2003
Holdcos permitted to become regional headquarters subject to certain criteria
2005
FICEs permitted to engage in retail, wholesale, fr anchising and commission agency business
7
Capital injections
Capital controls and capitalisation
• • • • •
FIEs are required to have a certain level of capitalisation or “total investment” Minimum debt:equity levels are mandated Capital injected as foreign currency can be converted to RMB Shareholders loans can be undertaken, but stringent restrictions govern their implementation Capital in RMB cannot be converted into FCY at will
•
Divestment and liquidation requires SAFE approval, and is predicated on various conditions having been met
Liquidity
Cash management
Cash concentration
•
Pooling and Netting – – Notional pooling: not an option Domestic Netting: impractical due to VAT and business tax issues Cross-border Netting: setting off inward and outward transactions contradicts China's import and export reconciliation regulations Entrusted loans: the only instrument available that permits intercompany borrowing and lending, via a bank
–
–
Repatriation
Repatriating funds
•
Not a simple matter of remitting funds overseas... – Dividends – Can be remitted annually – Do not currently incur WHT – General reserve funds are withheld at 10% of after-tax profits – Interim dividends are subject to specific approvals – Royalties – Viewed as a current account transaction if specified as such in contractual agreements – Do attract WHT – Management services and technology transfers – Can be paid for, as per royalties above, subject to approval by the relevant local authorities
Hedging
Hedging instruments
Onshore
• • • •
Market developing rapidly Cross-currency forwards available RMB/FCY forwards also now available...
USD; HKD; JPY; EUR; GBP; CAD; AUD; SGD
RMB/FCY swaps coming soon; interest rate swaps still not allowed
Offshore
• • • •
Non-deliverable forwards Not transactable from onshore in China Profit can’t be passed back to onshore subsidiary Retail NDFs now available in Hong Kong
Thank you