Dr Kuang-Hua Lin

To date, very few German companies in the Shanghai Pilot Free-Trade Zone know of the newly won freedoms available in terms of cash management. It is high time to change this state of affairs.

As of recently, it is permitted for all foreign companies in the Shanghai Pilot Free-Trade Zone (SFTZ) to practice cash pooling via a special bank account, the Free-Trade Bank Account, at an authorised bank. This means a foreign company within the SFTZ may borrow money from abroad provided that this amount does not exceed the initial capital deposited. It is also possible to lend money to affiliated companies abroad; however, the funds may not originate from the initial capital or by incurring debt.

With the regional expansion of the SFTZ, a great many German companies are today authorized to participate in cross-border cash pooling – for example, all companies located in the German Center Shanghai. By contrast, there are very few medium-sized German businesses that know about this, let alone make use of it. German banks in China are not entitled to it and therefore do not communicate about these newly created cash-management freedoms. So far, only a handful of large international banks, among them HSBC, are allowed to undertake cash-pooling business in China on behalf of their clients. However, all major Chinese banks are entitled to do so.

Cutting out entrusted loans

What is known as “domestic cash pooling” can also be an interesting option, as Chinese laws prohibit granting direct loans between companies. In simple terms, this means that if a German company in China owns two subsidiaries and one subsidiary wants to grant a loan to the other, according to Chinese loan rules, a bank must be involved. This process is called an entrusted loan. In this case, the lending company transfers the money to the bank, which then transfers the amount to the borrower, including added interest or a fee. In future, this indirect loan can be eliminated if one of the companies involved has its registered offices in the SFTZ.

Since 27 April 2015, the SFTZ has been extended to the following districts: Lujiazui (Financial District), Zhangjiang (High-Tech District) and Jinqiao (Factory District). This has two important implications for locally based German companies: on the one hand, the German Center in Shanghai is located in the Zhangjiang High-Tech District; thus, all tenants of the German Center are authorized to participate in international and domestic cash pooling as described above. Furthermore, Jinqiao is a location where production is also authorised. In the SFTZ – for example, in the district of Waigaoqiao – this was prohibited. As a result of this extension, setting up a factory within the SFTZ has now become a possibility.

Published in: Asia Bridge, 7/8:2015

German title: Cash Pooling nicht nur für Banken

Image source: @ fuyu liu – shutterstock.com