Favorable cash-pooling policy good for FDI

The People's Bank of China and the State Administration of Foreign Exchange are to optimize the pilot cash pooling program, integrating domestic and foreign currency management for multinational corporations in 10 provinces, municipalities and cities including Shanghai, Jiangsu province and Zhejiang province. They announced the decision on Tuesday.

Following China's steady and high-level opening-up, there has been an increasing demand for facilitating cross-border capital operation and management. As early as March 2021, the PBOC and SAFE initiated the first batch of pilot cash pooling programs, integrating domestic and foreign currency management for multinational corporations in Beijing and Shenzhen. In July 2022, the pilot was expanded to some other places, consisting of provinces, municipalities and cities.

This time not only has the pilot scope been expanded to include Jiangsu and Hainan provinces, but measures such as allowing intercompany loans in different currencies among different member enterprises of multinational corporations have also been adopted. These measures aim to reduce the financing costs for enterprises and make it more convenient to make cross-border payments.

For multinational corporations rooted in the domestic market, this is undoubtedly good news. The new policy will help them save costs by integrating domestic and foreign financial resources. For example, pilot enterprises can temporarily transfer funds from the integrated fund pool to overseas accounts to meet the capital certification requirements of overseas project companies.

Furthermore, if a domestic member enterprise of a multinational corporate group uses RMB as its base currency and an overseas member enterprise uses a foreign currency, they can arrange intercompany lending in different currencies according to their needs, reasonably allocate exchange gains and losses, and minimize the impact of exchange rate fluctuations on corporate operations.

Such favorable policies reduce financial costs, giving foreign companies a stronger incentive to start businesses in China. In the first three quarters of 2024, Shenzhen's foreign direct investment reached 25.25 billion yuan ($3.46 billion), while 6,421 new foreign-funded enterprises were established, accounting for 15.2 percent of new foreign-funded enterprises nationwide. These figures illustrate Shenzhen's attractiveness to global investors amid global uncertainties. In the foreseeable future, other pilot provinces and cities are expected to reap similar benefits, and the policy might be expanded to more regions.