Shanghai Free Trade Zone Services

How many business opportunities will be brought by SFTZ? Stay one step ahead with HSBC's experts to perceive and fores see global business opportunities in SFTZ.

Shanghai Free Trade Zone Services

HSBC Experts' Interviews

In partnership with the CBN, HSBC's experts will take a closer look at the China (Shanghai) Pilot Free Trade Zone, a model for future endeavours in China. Through the lens of HSBC experts, questions like the following will be answered. What opportunities can the SFTZ bring to businesses? Where is this new round of financial reform heading? What further policies can we expect? HSBC's experts will help you find a new way to succeed!

Episode 03 Terence Chiu Head of Commercial Banking HSBC China

HSBC Experts' Perspectives

Comprising financial sector leaders, economists, and various experts in other fields, HSBC's experts provide keen market insight and a wealth of experience in global business. We are committed to providing our customers with a broad and in-depth range of products and services. Through professioanl expertise, we offer the most comprehensive and customized solutions for RMB internationalisation, outbound businesses and other areas.

SFTZ: A Model for Future Endeavours

In early December 2013, the People's Bank of China ("PBOC") released its Opinions on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as the Opinions) with the aim of advancing financial reform in the SFTZ. This was followed on 20th February, 2014, by the PBOC's Shanghai Head Office issuing a series of documents that clarified specific rules to support increased cross-border use of RMB in the SFTZ.

Experimental measures taken in the SFTZ, including transformation of the role of government and streamlining administrative approval processes, as well as opening up six service industries, will provide a wider market for private and overseas capital. In turn, greater market participation will lead to a competitive yet level playing field that continually spurs innovation of new technologies and products. The hive of economic activity driven by these changes will touch all industries, including the banking sector, creating new opportunities for all.

HSBC China has studied and responded to the series of policies developed for the SFTZ, including the Opinions, with a range of innovative financial solutions such as RMB services in cash pooling, cross-border trade settlement, and international investment and financing. The most recent publication by the PBOC's Shanghai Head Office has clarified the requirements and roadmap for expansion of these services.

HSBC believes that, as set out in the State Council's Framework Plan for the SFTZ, the zone is a pilot scheme that will seek to create a model suitable for other areas of the country. Products created and tested in the SFTZ will eventually be rolled out, giving banks increasing opportunities to provide customers with better products and services to help them achieve their goals. In addition to continued reform of the administrative approval regime and the implementation of the Negative List, there will be financial reform including interest rate liberalisation, exchange rate liberalisation and full convertibility of RMB, all of which is seen by the market as the key to continued development of the SFTZ.

Among the many reform initiatives for the SFTZ, the Opinions covers almost all financial changes that are needed and exemplifies the determination of regulators for an ambitious reform agenda, as well as the far-reaching impact of such changes. Lessons learned in the SFTZ will provide a model for the rest of China: programmes within the zone will be monitored and where beneficial to business while carrying risks, if any, that do not jeopardise China's financial market, will be rolled out to other FTZs and even on a wider basis in the long run.

The SFTZ will be a source of much innovation that will provide lessons for other zones, as long as products delivered are real, consistent, compliant, and the associated risks are under control. Regulators hope to try out various options within the SFTZ's limited 29km2 and, by doing so, identify effective measures that serve to create better financial and operating environment for businesses, build stronger momentum for continued reform, and set a course for future development. As experiments in the SFTZ bear fruit, lessons learned will be rolled out nationwide.

HSBC has been looking into expansion of its services in the SFTZ in line with current policies. The first set of rules within the framework of the Opinions is now well in place with more expected to come gradually. Such development will diversify options available to businesses registered there in areas such as treasury, financing and settlement, while helping them better manage financial risks.

HSBC Pioneers Two-Way Cross-Border RMB Cash Pooling Business

Among the services currently offered in the SFTZ, two-way cross-border RMB cash pooling is an important magnet drawing multinational corporations (MNCs) to establish their Asia-Pacific headquarters in Shanghai. The service is paving the way for corporates to globalise their cash management. The fourth part of the Opinions on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as the Opinions) released by the People's Bank of China ("PBOC") clearly encourages an expansion in cross-border RMB services, a message that is reinforced by concrete rules from the central bank's Shanghai head office. Together, these documents have provided a policy framework for the development of cross-border RMB cash pooling service.

On 16th January 2014, HSBC China announced its first deal of cross-border RMB cash pooling in the SFTZ by delivering the service for the Dover Corporation via its subsidiary in the zone. The deal represents HSBC's first foray into the new territory and proactive response to the Opinions. The Dover Corporation thus becomes one of the first businesses to make use of cross-border RMB pooling within the SFTZ.

The Dover Corporation is one of the world's leading industrial product manufacturers. When the group struggled with seasonal cash-flow fluctuation, Dover sought out HSBC for a solution.

According to Michael Y. Zhang, President of Dover Asia, "HSBC's cross-border RMB pooling is crucial for Dover, as it helps not only to make regional fund utilisation more efficient but also to greatly enhance Dover's Asia operations. While supporting our subsidiary's business expansion in Asia, HSBC is also accelerating RMB internationalisation within Dover itself."

Speaking of this pilot business, HSBC says the deal with Dover began with a year and half's worth of preparation by HSBC China back in 2012. HSBC looked into the existing policies and helped Dover to put together a framework for action. By fully leveraging its global connectivity, the bank created an effective and innovative solution that addresses Dover's needs in a way encouraged by the policies.

Point 16 of the Opinions states, "Businesses within the SFTZ are allowed to conduct intra-group two-way RMB pooling business based on their own needs, providing access to centralised collection and payment services under the current account to their onshore and offshore affiliates." With this basis in regulation, HSBC is providing tailored cash management solutions to Dover within the SFTZ and will ensure that all ensuing developments meet the requirements of the PBOC's Shanghai Head Office.

On 21st February 2014 HSBC Bank (China) Company Limited ("HSBC China") today launched a centralised renminbi ("RMB") cross-border transaction management solution for its corporate clients in the China (Shanghai) Pilot Free Trade Zone ("Shanghai FTZ") by delivering the new service to Saint-Gobain via its subsidiary in the pilot zone. This innovative cash management solution covers functions including pay-on-behalf and receive-on-behalf ("POBO/ROBO") and netting.

Saint-Gobain, the world leader in the habitat and construction markets, designs, manufactures and distributes high-performance building materials, providing innovative solutions to the challenges of growth, energy efficiency and environmental protection. Since entering China in 1985, Saint-Gobain has invested over EUR2 billion in the market and grown the business rapidly. Via its subsidiary in the Shanghai FTZ, it is able to centralise payments and collections for merchandise and services trade settlement, along with other current account items, and subsequently improve the efficient use of RMB settlement within the group. This solution thus also enhances the cash management efficiency for its Asia Treasury Centre located in Shanghai.

Centralised payments and collections is an efficient cash management solution for multinational companies' need to manage intra-group account payables and receivables. The newly-launched scheme in the Shanghai FTZ now applies to RMB cross-border settlement, enabling corporates to consolidate and offset account payables and receivables through a single transaction.

Centralised RMB cross-border payments and collections will bring significant benefits to our clients by simplifying their payment processes, reducing the number of transactions and unlocking additional liquidity. It therefore helps improve the efficiency of funding management and settlement, reducing funding cost and foreign exchange risk.

Currently, market demand for cross-border RMB cash management comes from three sources. The first of these is the need for cross-border capital flow, including investing surplus corporate capital in offshore markets, and Chinese businesses seeking to capitalise on overseas opportunities for financing. The second source concerns corporate demand for centralised and automated cross-border trade settlement. The third one is the need for full convertibility of the RMB. Although some Chinese businesses have developed onshore pooling services in the past, there is still pressing demand for further expansion of these services into a platform for regular cross-border cash management. It's equally imperative is to develop, based on actual needs, a cross-border investment and financing mechanism. When both are done, a two-way cash pool will be in place.

Cross-border RMB pooling is an experimental effort for HSBC and provides an effective solution for MNCs to channel funds across Chinese borders. This will help corporates to sweep and integrate working capital for their Chinese and international business and even link it up with global pools automatically. Cross-border RMB pooling represents an opportunity to make corporate treasury much more convenient and transparent, allowing businesses to better manage their liquidity.

In the long term, innovative policies developed for the SFTZ will link up China with global funding channels, a development with strategic implications. Currently, MNCs tend to establish a network of treasury centres (cash pools) around the world, with Asia-Pacific operations overseen from Hong Kong or Singapore.

Two-way cross-border RMB cash pooling, as launched by HSBC, will become one of the major factors attracting MNCs to set up their Asia-Pacific headquarters in the SFTZ; the city currently hosts 200 such regional headquarters. The service will also open up a new gateway for corporates to globalise their cash management.

HSBC's China Desks: Going Global through the SFTZ

In 2010, HSBC began to establish a network of China Desks around the world, with the aim of assisting Chinese businesses to 'go out' in such ways as cross-border trade, investment and financing. As of February 2014, HSBC had set up China Desks in 19 different countries and regions, catering to Chinese businesses with a series of financial services that connect them with the rest of the world.

The Opinions on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as the Opinions) released by the People's Bank of China seeks to encourage Chinese businesses to go global. Within the framework of the document, a set of detailed rules for cross-border RMB use has been published, and it is likely that an increasing number of Chinese businesses will use the SFTZ and HSBC's China Desks as a stepping stone towards the international market.

In particular, future regulation will probably be streamlined to further facilitate investment by Chinese businesses going abroad as well as attract more foreign investment to China. According to the Opinions, cross-border direct investment by businesses registered in the SFTZ can be conducted and delinked from upfront verification as required by the regulations of the Shanghai municipal government, i.e., cross-border payment, receipt, and exchange involved in the investment can be directly processed by banks. Recent circulars about expanding cross-border use of the RMB are sending a clear message that businesses in the SFTZ are allowed to conduct centralised collections and payments in RMB under the current account. "Going out" will be thus made easier for Chinese businesses.

HSBC believes that the SFTZ's value lies in its reduction of the red tape around administrative approval, allowing Chinese companies to more easily break into the international market. In addition, financial reform initiatives in the SFTZ will spur Chinese business demand for overseas investment and capital, which is precisely where HSBC's China Desks come in.

HSBC's clientele includes a number of large and medium-sized corporates. Many of them have more than 100 outlets across China as well as investments overseas. These companies hope to invest and finance on a global scale through the SFTZ, concentrating their capital in the zone. In the past, these clients would have located treasury centres in other parts of Asia to coordinate their global operations.

From another perspective, HSBC's China Desks will benefit from development in the SFTZ as well and thus be able to help corporate clients to transfer funds from China to other countries and vice versa. The China Desks can also help to attract more businesses to the SFTZ, aiding the zone to become a global investment platform for all businesses alike. Chinese companies will also benefit from streamlined overseas investment channels that allow them not just to "go out" but to do so successfully and sustainably.

HSBC is well aware of the global ambitions of many Chinese companies. However, they are usually unfamiliar with local customs, culture and legal systems, as well as investment and financing schemes of destination countries. Therefore, specialist institutions are needed to bridge the knowledge gap and resolve issues on the ground. HSBC's China Desks provide exactly the specialist services and solutions necessary for Chinese businesses interested in overseas capital, investment or in M&A. These include consulting, bilateral loans, syndicated loans, long-term bonds, equity financing for listed companies, and trade services. More importantly, they are offered as packages of one-stop total solution.

HSBC believes in its competitive edge as a foreign bank in China: we can leverage our global network to provide investment, trade, M&A, financing and other services for our clients. That is also the driving factor behind the establishment of the China Desks. To take a simple example: a company registered within the SFTZ gains access to streamlined channels for overseas investment, for example in Brazil. HSBC's China Desk team in Brazil will manage the programme there, while the China Desks in Singapore or Hong Kong can raise capital from their local regions and channel it to the Brazil project. This demonstrates to a great extent the global connectivity and capabilities of the China Desks.

HSBC's Cross-Border Services: A Boost to RMB Internationalisation

The SFTZ is an engine for the process of RMB internationalisation with cross-border RMB services playing a pioneering role in financial innovation within the zone. RMB internationalisation addresses the basic issue of liberalisation and further streamlining of the current account (cross-border trade and settlement) and capital account (cross-border investment and financing); it is also an important component of the Framework Plan for the SFTZ.

On December 2nd 2013, the People's Bank of China ("PBOC") released its Opinions on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as the Opinions), consisting of thirty points that touch five major areas: 1) innovations in account management system that facilitates risk management, 2) streamlining exchange and remittance processes for investment and financing, 3) expanding cross-border use of the RMB, 4) gradual steps for interest rate liberalisation, and 5) further reform of forex administration. This was followed on 20th February, 2014, by the PBOC's Shanghai Head Office issuing its Circular on Supporting Expanded Cross-Border RMB Use in the China (Shanghai) Pilot Free Trade Zone, which specified regulations for pilot services within the SFTZ. These included cross-border RMB settlement under the current account and direct investment account, personal banking settlement accounts, offshore RMB lending, and two-way RMB cash pooling. The new set of rules represented another step forward for RMB internationalisation.

HSBC has consistently led the way in developing cross-border RMB services and the SFTZ is no exception. We are the first foreign bank to launch two new businesses in the SFTZ.

On 16th January 2014, HSBC China began working with a subsidiary of the Dover Corporation based in the SFTZ to develop cross-border RMB pooling services. The programme was HSBC's first SFTZ venture in this area; the Dover Corporation is one of the first foreign corporates to develop such services. Cross-border RMB pooling represents an important development in foreign bank support for the real economy since the release of the Opinions. Continued financial regulatory development in the SFTZ will afford a greater diversity of choice to registered businesses in terms of treasury, financing, settlement and other areas, as well as enhanced capability of financial risk management. Cross-border RMB pooling will enable clients to diversify financing channels and obtain funding for future development at a lower cost.

On 21st February 2014, HSBC China launched a centralised RMB cross-border transaction management solution for its corporate clients in the SFTZ by delivering the new service to Saint-Gobain, a French company, via its subsidiary in the pilot zone. This innovative cash management solution covers functions including pay-on-behalf and receive-on-behalf ("POBO/ROBO") and netting, making HSBC part of the first wave of banks involved with this line of service in the zone. The solution is helpful for Saint-Gobain to settle in RMB more efficiently within the group. It will also enhance the cash management efficiency for the company's Asia treasury centre located in Shanghai. Centralised collections and payments under the current account are a highly efficient way for MNCs to manage intra-group account payables and receivables. The newly-launched scheme in the SFTZ now applies to RMB cross-border settlement, enabling corporates to consolidate and offset account payables and receivables through a single transaction.

HSBC will continue to promote new services in the SFTZ aside from cross-border RMB services, including treasury products, in order to meet demand from Chinese and foreign businesses within the zone.

Cross-Border Trade Facilitation Offers Exciting Opportunities Ahead

In addition to cross-border RMB cash pooling, HSBC is continually exploring other new financial options in the SFTZ. These include financing and settlement for trade in goods and services (current account), and cross-border investment and financing (capital account). HSBC is endeavouring to meet the financial demands of Chinese and foreign corporates within the SFTZ by continually creating innovative products. In the long term, HSBC wants to help Shanghai realise its goal to become an international economic, financial, trade and shipping centre. As reform initiatives to facilitate trade are put into effect on the ground, the financial industry stands to benefit from trade facilitation, port construction and logistics within the SFTZ.

Firstly, HSBC has been a consistent and vocal supporter of trade facilitation. Last year, HSBC assisted a manufacturer of electronic system equipment in its first RMB trade settlement right after the People's Bank of China ("PBOC") simplified and improved regulations governing cross-border RMB services. HSBC helped the client to settle a payment in RMB to its counterparty in Singapore for a batch of imported goods directly with the Explanation of Cross-Border RMB Settlement Collections/Payments. Prior to the reform, businesses were obliged to present proof of the business concerned in order to complete settlement.

Secondly, HSBC has ventured beyond conventional services for trade in goods and into innovative solutions for trade in services. In addition to providing financing for goods traders, HSBC is exploring financing options for 'asset-light' service traders. Unlike goods traders, service traders have no collateral for raising capital. That means financial institutions need to well manage risks for financing via innovative approaches.

The Circular on Supporting Expanded Cross-Border RMB Use in the China (Shanghai) Pilot Free Trade Zone released on February 20th by the PBOC's Shanghai Head Office clarified regulations governing cross-border RMB settlement for e-commerce, which are expected to provide a wider market for banks.

Offshore RMB Financing: A Much Needed Solution for Corporate Funding

Financing and investment on a global scale are everyday matters for multinational corporations. In the long run, experiments in the SFTZ will go beyond cross-border trade and investment and into financing both direct and indirect. Cross-border indirect financing mainly involves borrowing from offshore banks, while direct financing is focused on equity and debt financing.

Hong Kong has long been a 'bridgehead' for Chinese offshore financing; in particular, its 'dim sum bonds' or offshore RMB bonds have grown into a substantial market worth several hundred billion yuan. Many onshore corporate clients are talking about the possibility that the SFTZ will one day become another offshore 'dim sum' bond market and are full of anticipation; at the same time, many of our overseas corporate clients are interested in the potential benefits in terms of equity financing to be derived from registering in the SFTZ.

The Opinions on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone released by the People's Bank of China ("PBOC") sets out that "financial institutions and businesses in the SFTZ can invest and trade on the securities and futures markets in Shanghai in accordance with relevant regulations. The overseas parent company of a business registered in the zone is allowed to issue RMB-denominated bonds in China's domestic capital market in accordance with relevant regulations." Additionally, the SFTZ's separate accounting system permits offshore institutions not registered in the zone to open non-resident free trade accounts, and to transfer cash freely from or to resident free trade accounts, offshore accounts and non-resident PRC accounts outside the SFTZ. Offshore institutions seeking to conduct business within the SFTZ will find a less restrictive policy framework in which to conduct trade, financing and investment.

Furthermore, the PBOC's Shanghai Head Office has also clarified regulations governing offshore financing in RMB for financial institutions and businesses registered in the SFTZ, as set out in its circular concerning expanded cross-border use of the RMB released on February 20th, 2014. The document provided a concrete basis for the delivery of these services. HSBC will continue to monitor and study policy developments related to the SFTZ, and match each new change with an immediate financial solution.

HSBC's Advantage & Its SFTZ Sub-Branch

As one of the first foreign banks approved to establish a presence in the SFTZ, HSBC continues to stand at the forefront in supporting the country's financial reform initiatives including RMB internationalisation, maintaining its leadership among foreign banks in China across a broad spectrum of businesses.

On 27th January 2014, HSBC China officially announced the opening of its SFTZ sub-branch. While focusing initially on servicing corporate customers with cross-border financial needs, the new outlet offers a range of banking services, such as account opening, cross-border payment and settlement in multiple currencies. Its service scope and business scale are set to expand further as policies governing the zone evolve. The opening of HSBC's SFTZ sub-branch represents another concrete step in the bank's support of and active participation in China's financial reform.

HSBC will leverage this platform as it continues its efforts in advancing product and service innovations. As a leading international bank, HSBC is ideally positioned to deliver its cross-border expertise into the zone to meet customers' financial needs for trade and investment and to support the development of China's real economy.

As one of the oldest foreign banks in China, HSBC is well versed in the country's financial policies and regulations not only on paper but also between the lines. At the same time, HSBC is pragmatic when providing services and products on the ground and is a forward partner in all projects. HSBC also has the advantage of a global network, with a wealth of experience in cash pooling, financing, trade and investment, which allows it to learn from success in different markets and then create tailored solutions for customers based on local realities, helping them to succeed within the SFTZ and beyond in the wider Chinese and international markets.

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