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Measuring Value®: RMB: Cash flowing and cash trapped

Issue 4, October - November 2009


价值衡量This latest issue provides an overview of some of the key strategic and tactical approaches to minimise the trapped cash risks. The global financial crisis is reshaping the world’s financial systems as well as creating pressures on China’s traditional financial regulations and practices. Companies active in China are advised to be diligent in checking their currency treasury activities and be on the alert of changing regulations and best practices.

Key points covered in this issue include the following:

  • Given the global credit situation and the extreme pressure to improve liquidity in virtually every major MNC, it is a good time to review the issue of cash management in China and consider some of the potential prospects for change.
  • For the unwary foreign investor, cash can get trapped as a result of the way initial capitalization of an enterprise is structured and as a result of profits generated from successful operations, or simply fees charged or loans extended by overseas companies that cannot be remitted due to government rules and regulations.
  • The only straightforward way to repatriate capital contributions is formally to reduce an entity's registered capital, a difficult undertaking.
  • There are basically three strategic imperatives in minimizing the trapped cash problem:
    • Foreign investors should avoid putting any more capital at risk through early and informed planning for any registered capital requirements or anticipated operating cash requirements prior to an enterprise generating sufficient cash flow to be self-sustaining
    • Structural and service arrangements should be carefully planned to support the movement of as much cash as possible under rules governing current account transactions as opposed to capital account transactions
    • It is preferable to minimize the number of separately licensed entities and use branch structures
  • To avoid unnecessary cash traps related to registered capital in the early stages of a new enterprise or during restructuring, the major key is optimal use of debt, both off-shore debt originating in foreign currency and on-shore debt in RMB.
  • If on-shore funds cannot be legally repatriated to an off-shore parent, it is important to explore potential uses for the funds other than depositing them in low-yielding Chinese bank accounts.
  • It is often in the intersection of these diverse control regimens that knowledgeable and agile foreign investors can find excellent solutions to issues like trapped cash.
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