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Choosing the right financial strategy for your China business ventures

Choosing the right financial strategy for your China business ventures. HKTDC 02 November 2005 Phil Spencer, Divisional International Business Manager HSBC. Contents. Currency Capitalisation Liquidity Hedging. section one. section two. section three. section four. Currency.

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Choosing the right financial strategy for your China business ventures

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  1. Choosing the right financial strategy for your China business ventures HKTDC 02 November 2005 Phil Spencer, Divisional International Business Manager HSBC

  2. Contents Currency Capitalisation Liquidity Hedging section one section two section three section four

  3. Currency

  4. Effectively pegged against USD at 8.2767 • Revalued by 2.11% • Put on a managed float with reference to a basket of currencies • Traded within a band against USD • Middle rate announced at the close of trading Prior to 21 July 2005 The Renminbi (RMB) On 22 July 2005 Now...

  5. 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 Currency restrictions Convertibility

  6. Capitalisation

  7. Company structures FICEs Holdco RHQs Growing number of investment vehicles available Holdco Franchising CJV Vehicles WFOE FICLS EJV Low cost manufacturing Domestic Sales Globalization Trends Export oriented JVs 2005 1979 1986 1988 1995 2003 Open door policy EVJ law passed WFOEs permitted in certain industries CJV law passed Holdco regulations promulgated, CLS regulations also passed Holdcos permitted to become regional headquarters subject to certain criteria FICEs permitted to engage in retail, wholesale, franchising and commission agency business Milestones

  8. 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 Capital controls and capitalisation Capital injections

  9. Liquidity

  10. 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 inter-company borrowing and lending, via a bank Cash concentration Cash management

  11. 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 Repatriating funds Repatriation

  12. Hedging

  13. 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 • 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 Onshore Hedging instruments Offshore

  14. Thank you

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