Treasury and Trade Solutions Ushering in A New Era of Renminbi Liberalization August 2015
Understanding and the Renminbi Liberalization Cross border controls in continue to relax Understanding the RMB Internationalization Renminbi (RMB) internationalization: Milestones CNY 5th payment currency globally RMB trade reaches CNY450 billion and accounts for ~25% of all payments to/ from Foreign currency (FCY) deregulation: Milestones CNY-CNH FX Curves starting to diverge again with devaluation Different CNY-CNH Interest rates curves 1
Integrating into Global Treasury Structures Benefits of RMB for invoicing Sourcing from and selling overseas Sourcing overseas buyers in What does the internationalization of the RMB mean for you? Illustration: Comparison between RMB and USD settlements Move FX risk management to HQ Simpler trade documentation process Intercompany: Possible suppliers discount Remove FX exposure in Chinese entity Move FX risk management to HQ Third party: Access to larger supplier base Broaden customer base Expedite collection cycle Simpler trade documentation process (vs foreign currency) Improved cash forecasting Trade documentation to be amended to include CNY as trading currency Payment terms changed Settlement account Intercompany agreement POA authority document *CIPS is expected to improve the return/ reject rate and allow for more efficient clearing when deployed. Timeline to be confirmed Invoice (fa piao) 2
Integrating into Global Treasury Structures Shanghai Free Trade Zone (SFTZ) vs. Nationwide: Application of treasury solutions RMB SFTZ Nationwide SFTZ Nationwide Cross border lending from No regulatory approval or quota requirement SAFE approval required Lending quota up to 50% equity FCY SAFE approval required Lending quota up to 30% equity Two-way cross border lending and borrowing with No approval required and no quotas stipulated* PBOC filing required** SAFE filing required with borrowing and lending quota/requirements Cross border POBO/ROBO and intercompany netting No approvals required and no quotas stipulated Only for qualified companies SAFE approval required SAFE approval required and only for qualified companies Offshore financing Via the Free-Trade Accounting Unit (FTU), there is flexibility for the company to determine source (onshore or offshore market) and amount Limited to foreign debt quota Via the Free-Trade Accounting Unit (FTU), there is flexibility for the company to determine source (onshore or offshore market) and amount*** Limited to foreign debt quota * Citi may be required to set a limit on borrowing from the overseas entities ** Borrowing quota stipulated only for qualified companies *** Subject to different calculation methods 3
Integrating into Global Treasury Structures Application of Cross Border RMB netting and POBO/ROBO models Overseas application application SFTZ Parties involved Typically intercompany Allows customers and suppliers to be included Nationwide Intercompany only Settlement parties involved Settlement between netting center and participants Leading company can be used as pass-through; or settlement between netting center and participants* Settlement between netting center and participants* Settlement frequency Usually monthly Intraday basis, calculation may be done monthly Settlement account On books of in-house banks Settlement must be through actual bank accounts Virtual settlement Location of netting center Centralized in single location Leading company to act as passthrough for participants; or domestic participants can settle with global netting center* Qualification criteria Not specified Leading company must be registered in the SFTZ Domestic participants can settle with global netting center* Only for qualified companies * Not available for POBO/ROBO 4
Integrating into Global Treasury Structures Application of cross border RMB liquidity structures Cross border liquidity structures with Overseas application application RMB FCY Underlying transaction Usually for intercompany lending, but not specified Must be on back of intercompany lending and borrowing Bank account Jurisdiction specific, but normally direct header child relationship Requires special/ multi accounts as pass through to reverse entries and interest reallocation Loan quotas Company specific Regulation quota applies, or Citi may be required to set a limit Parameters Based on bank capabilities and company structure Regulatory controls as determined by programs For example, reverse sweeps constrained by quotas 5
Case #1: RMB Cross Border POBOROBO and Netting Companies can engage in RMB cross border POBOROBO and Netting in for trade and non-trade transactions in SFTZ and recently extended Nationwide. Offshore Vendors Offshore Customers Company - International Pharmaceutical Company Trade & Non-trade Offshore Vendors POBO Netting Center Netting RMB A/C Domestic Sub 1 Offshore Customers ROBO RMB Onshore Account Trade & Non-trade Hong Kong Structure Open a RMB special account for cross border POBO ROBO to achieve operational efficiency Allow the structure for trade and non-trade RMB cross border transactions Leverage the RMB special account to conduct payment netting with the overseas netting center Benefits of Citi Solutions End to end netting payment and report support Consistent platform globally for payment and receivables Citi-Netting system to support groups without IHB arrangement RMB A/C Domestic Sub 2 Contract/Invoice Payment netting Onshore payment Onshore receivables 6
Case #2: RMB Cross Border Automated Lending By leveraging on Citi s global liquidity platform, corporate can include the RMB fund in into its global pool arrangement through RMB Cross-border Lending. Company International Shipping Company Client s objective Possible inclusion in Global liquidity Structure Offshore RMB (CNH) A/C Lending Repayment Hong Kong Transfer surplus cash in to global treasury center in a timely and automated fashion Ensure that entities in have sufficient cash to meet their daily operating requirements Structure Onshore RMB (CNY) A/C Citi Platform automatically cross border sweeps RMB from to offshore as cross-border Lending; process the sweeps from overseas back to for cross border loan repayments. RMB cross border sweep links to onshore lender s domestic pool. Domestic Pool Benefits of Citi Solutions Provide corporate a new channel to release RMB liquidity in Automatic Sweeping Increase the treasury efficiency in regional/global level by making use of RMB funds in Funds centralized at the group level overseas & local daily operating requirements satisfied Improve the process efficiency via auto sweeping platform 7
Case #3: RMB Cross Border Physical Pooling in the SFTZ Guidelines of the SFTZ allow for RMB to be included in regional/ global liquidity management structures. This structure can also be replicated to companies applying nationwide policy. Company International Pharmaceutical company Client s objective Possible inclusion in Global liquidity Structure Domestic entity is registered in the SFTZ Offshore RMB (CNH) A/C Onshore RMB (CNY) A/C Domestic Pool Automatic Sweeping Cross Border Lending/Borrowing Hong Kong Build up of idle cash in in a few entities with unpredictable & occasional RMB funding requirements Structure Citi Platform automatically cross border sweeps RMB between and offshore for cross-border Lending or Borrowing RMB cross border sweep link to onshore domestic pool. Benefits of CitiSolutions Enhances treasury management practices which can now include liquidity Free up trapped cash from successful operations Ability to utilize excess funds from overseas operations to fund temporary shortfalls in Considerations in implementation No co-mingling of self-sourced funds with 3rd party financing (e.g. bank loans) There needs to be sufficient proof of funds involved as self-owned, otherwise, there could be restriction on net cash inflow to 8
Glossary Free-Trade Accounting Unit (FTU) The FTU is a separate accounting unit that only Shanghai based financial institutions can operate. It separates a financial institution s operation in the Shanghai Free Trade Zone from its other business in, enabling it to conduct Free Trade Agreement business. People s Bank of (PBOC) s central bank tasked with the power to control monetary policy and regulate financial institutions in mainland. State Administration of Foreign Exchange (SAFE) The government agency in tasked with drafting rules and regulations governing foreign exchange market activities, and managing the state foreign exchange reserves. Shanghai Free Trade Zone (SFTZ) s first free-trade zone in mainland, launched in 2013. The SFTZ was used as a test bed for regulatory reforms, and since then, the Chinese government has since expanded the SFTZ geographically as well as introduced new Free Trade Zones. 9
IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have been written in connection with the "promotion or marketing" of any transaction contemplated hereby ("Transaction"). Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment or firm offer and does not obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the information contained herein and the existence of and proposed terms for any Transaction. We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may also request corporate formation documents, or other forms of identification, to verify information provided. 2015 Citibank, N.A. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. 2015 Citibank, N.A. London. Authorised and regulated by the Office of the Comptroller of the Currency (USA) and authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.