The Dilemma of Cash Management in China

Bachelor Thesis from the year 2006 in the subject Business economics - Investment and Finance, grade: gut bis sehr gut, University of Zurich (Institut für schweizerisches Bankwesen), course: Semester Paper, 50 entries in the bibliography, language: English, abstract: During the past few years China has attracted investment by foreign multinational companies. With its entry into the World Trade Organization (WTO) on 11 December 2001, China promised to further open up its market to foreign goods and services, and to welcome foreign investment in the following five years in previously restricted sectors such as banking and financial services. However, China's cash management environment still provides many impositions and obstacles to challenge corporate treasurers. Moreover, unwritten local customs and practices, coupled with the lack of written regulations, do not ease situation. And making this even more complex is the fact that the regulations are changing all the time. Therefore, 'many companies [...] still find it challenging to implement comprehensive cash management arrangements.'1Often complex regulations, foreign exchange (FX) controls, unique operating conditions, and developing clearing and banking infrastructures complicate the implementation of cash management techniques widely used elsewhere in the world. Hence, this paper introduces the reader to the complex requirements, impositions and obstacles of cash management in China. In this paper the author focuses on two cash management instruments,nettingandcash pooling,and presents the associated dilemmas. Furthermore, the author highlightsentrusted loansas an alternative solution. In the course of the paper it becomes clear that implementing cash management instruments requires testing the boundaries of regulation and technology. Meanwhile, but still limited to a few selected MNCs domiciled in certain areas, pilot programs arise relaxing FX restrictions and allowingcash poolingas well asnetting.However, despite China's fast evolving banking and cash management environment, some techniques, e.g.netting,are basically prohibited or at least prevented by extensive FX authority regulations. While some of the cash trap situations can be avoided through proper documentation and careful planning regarding capital structure, others can be handled by implementing particular solutions. The latter holds forcash pooling.Besides processingnotional poolingto avoid a prohibited intercompany loan creation,entrusted loanscan reduce the operational activity burden on a company's treasurer.