Economists both inside and outside China have long argued that the country needs to liberalise its capital controls as a step to facilitating growth and rebalancing toward greater domestic consumption. But perhaps many have wrongly assumed that the opening, when it comes, would be a flashy reform overhaul. The reality is turning out to be very different. Over the past year or two, subtle changes deep within the wiring of China’s foreign-exchange regulations have been quietly opening up the capital and current accounts in ways that will have a profound effect on companies doing business there.
Consider a significant but little-noticed recent measure. In March the People’s Bank of China (the central bank) approved a new scheme making it easier for a European Fortune 500 company with substantial sales in China to manage its yuan holdings. Under the previous practice, the company had to process multiple cross-border yuan payments separately, a system that was time consuming, cost more and generated a large amount of paperwork, mainly to facilitate regulatory oversight.
deep within the
wiring of China’s
foreign-exchange regulations have
Under the new scheme – a so-called gross-in/gross-out arrangement – the company can consolidate all its incoming yuan transactions during a certain period of time into one payment, and all its outgoing yuan payments into another. This makes it significantly simpler for the parent company to manage its overall yuan cash flow more efficiently.
Another quiet breakthrough came last September. The State Administration of Foreign Exchange started progressively relaxing the rules on what multinational companies, both domestic and foreign, can do with their operating cash by launching a Foreign Currency Centralised Management pilot programme.
To some extent cross-border cash management used to be a challenge for treasurers of multi-nationals doing business in China. Regulatory restrictions made it less convenient to get cash in and out of the country. As a result, corporate treasurers couldn’t do with Chinese cash what they generally do with other short-term spare cash generated by day-to-day operations – put it to work where it is most effective for paying down debt, hedging exchange risks or generating returns.
September’s pilot programme eases these hassles by allowing companies that generate substantial foreign currency within China to consolidate that cash into a single pool and sweep it overseas, where treasurers can manage it the way they manage cash generated by their business in other countries.
These trial reforms, while still relatively modest, are significant in large part because they show a way forward for capital-account liberalisation. China has stated its desire to “internationalise” the yuan, increasing the currency’s use for trade, investment and perhaps, even one day as a reserve. But the regulators have also been wary of potentially destabilising capital flows as they reform procedures that previously made it easier for them to track capital in and out. That helps explain why we have not seen the grand overhaul some hoped for.
Instead these changes have been carefully targeted. They facilitate real flows of operating funds while maintaining the bulwark against speculative flows. This makes them consistent with other measures to relax restrictions on the capital account, such as the expansion of the Qualified Foreign Institutional Investor scheme, which allows foreigners to bring portfolio investment capital into China but only in a carefully regulated manner.
Allowing companies to incorporate yuan into the ebb and flow of their treasury management operations marks another milestone in integrating the currency into the global economy.
China still has some way to go. We estimate that the total offshore yuan funds – a combination of deposits, certificates of deposit and so-called dim-sum bonds – stands at approximately 1 trillion yuan (USD162.21 billion). That’s a substantial amount, but not yet a deep enough pool to attract the big global investors that would make the yuan a truly international currency.
The delicate process of freeing up China’s capital and current-account restrictions to allow the yuan to play a role commensurate with China’s industrial power will take time. But the recent steps to facilitate cash management will cut costs for foreign corporations operating onshore, accelerate the integration of the yuan into the global economy, and boost offshore liquidity.
A version of this article originally appeared in The Wall Street Journal on Thursday, 2 May 2013.