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RMB outflow curbs continue - but there are other channels

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MORE THAN ONE: Ms Cheung says sweeping is not the only channel - clients can, say, issue dividends or extend shareholder loans.

Singapore

FIVE months after China suspended RMB (renminbi) outflows via an automated mechanism, corporates are said to be reverting to former channels to send out "trapped" funds.

Vina Cheung, HSBC Asia Pacific's global head of RMB internationalisation, global liquidity and cash management, said there are alternatives. "Sweeping, if you have it, is a very dynamic and flexible self-funding mechanism for daily working capital management.

"However, sweeping is not the only channel. Clients can structure one-time bilateral loans. They have different channels to do outflows - (like) dividends and shareholders loans."

Temporary suspension of RMB outflow sweeps by the authorities in January still in force led initially to operational cashflow issues for some corporates, said one banker. To help corporates with their "trapped" funds in China, banks use notional aggregation - where the current account balances in China are aggregated with the balances held in other regions and currencies to help corporates enjoy higher yields and optimise borrowing costs, said another banker.

It's not unusual for banks to provide such aggregation services under their cash management offerings to multinationals, where the cash balance of one subsidiary in one country may be short while an affiliate is long in another jurisdiction.

Cash pooling or sweeping allows MNCs to move funds across regions among their various subsidiaries and affiliates efficiently.

The People's Bank of China (PBOC) told banks in January to limit RMB outflows of multinationals via cash pooling or sweeping in what was said to be a move to stabilise the currency, reports said then.

The restriction - while irksome to MNCs which had begun using sweeping after it was given the green light in 2014 - is said to have involved only small amounts, especially when compared with funds sent abroad as overseas direct investment (ODI). ODI rose 14.7 per cent from a year earlier to US$118 billion in 2015 (there is no data for RMB outflows via sweeping).

The thinking was that the suspension was a signal to the market that banks should do due diligence on fund outflows (that is, monitor the outflows' purpose).

Observers note that China stays committed to RMB internationalisation and they expect the current restrictions not to last.

Suan Teck Kin, United Overseas Bank senior economist, said the RMB internationalisation trend will likely continue, especially in light of Beijing's "One Belt, One Road" economic initiative. "China continues to open its onshore financial markets to global investors, such as the upcoming Shenzhen-Hong Kong stock connect," he said.

"Therefore, we anticipate the PBOC will gradually relax the current controls of RMB outflows in the longer term, as RMB usage continues to increase."

Meanwhile, there are other things corporates can do to mobilise their surplus liquidity in China, said HSBC's Ms Cheung.

"It's imperative for companies trading with China to be RMB-ready in order to support the currency's expanded role, not just for liquidity management but also payments for trade and working capital purposes. Our clients with treasury centres in Singapore use RMB intra- group payments to mobilise their surplus liquidity in China."

Singapore is one of the offshore RMB clearing centres, and RMB in offshore markets is considered very fungible - with in- depth liquidity, and risk management or hedging solutions.

Ms Cheung said: "Intra-group payments can be one of the best solutions because the use of RMB for working capital and trade settlement purposes is valid and helps the business case for RMB outflow requests to authorities, as it represents the appetite of international companies managing RMB exposure."