The changing China trade landscape: Myth and reality

Every trader in the world has China on its radar screen, but there is a lot of misinformation about doing business on the Mainland.
With 1.3 billion people, China is not only the most populous nation in the world, and the largest emerging market, but also the second largest economy in terms of purchasing power û an extraordinary transformation from being a closed state to becoming major creator of prosperity on the world stage. Multinationals and financial institutions seeking access to the potential this represents would do well to seek the services of a knowledgeable guide.

Examining the profit repatriation myth

In an environment characterised by change, concerns around profit repatriation are not surprising. Rumors abound that ôitÆs impossible to take profits out of Chinaö, or that ôbanks in the home country are unwilling to exchange renminbiö.

However the reality is threefold:

First, working out a strategy for profit maximisation and subsequent repatriation is a technical tax and legal issue that requires professional guidanceùand should not conflict with your companyÆs articles of association.

Second, should you make the decision to repatriate your after-tax profits, China has had a system of current account convertibility since 1996, enabling foreign companies to have their banks arrange remittance of RMB funds in the foreign currency of their choice.

Third, there are major incentives to reinvest profits in China. For instance, your refunds on taxes paid can be as high as 40% of the total Foreign Enterprise Income Tax paid, and under some circumstances (Hi-Tech, Total Export, or Special Treatment Operations) up to 100% of profits tax paid. But keep in mind, incentives are applicable only if your profit remains in China and that the re-investment remains in the business for five years.

Exploring the foreign investment myth

In the last two years, ChinaÆs performance has been legendary on multiple levels. With annual growth rates as high as 10%, the process of its accession to the World Trade Organisation (WTO) and an increasingly sophisticated employment market all accomplished within a tightly regulated framework. The reality is, the Chinese government has been incrementally introducing changes to foreign currency regulations, in an effort to make it easier for multinational companies to conduct business.

The Pudong Nine Measures Pilot Programme

In October 2005, the State Administration of Foreign Exchange (SAFE) and the Shanghai Pudong City Government (SPGC) jointly introduced a pilot programme to relax foreign currency restrictions on qualified multinational companies (MNCs). The programme, termed the 'Pudong Nine Measures', enables MNCs with regional headquarters located in the Pudong New Area to run corporate treasury functions more effectively from China. Pudong is ShanghaiÆs hyper-modern new area, the centerpiece of which is the Lu Jiao Zuni financial district.

Under the Pudong Nine Measures, Chinese or foreign MNCs must be based in Pudong, own Chinese and foreign subsidiaries. The key benefit for MNCs is the introduction of foreign currency cash pooling using inter-company entrust loans. Previously prohibited foreign currency hedging instruments are also available. The reforms also made Pudong significantly more attractive as a potential location for MNCs to set up shared service centers providing treasury functions.

Beyond the Nine Measures

The results were so successful, the government decided to introduce additional FX regulatory reforms.

In April 2006, two of the Pudong Measures, namely permission to open multiple foreign currency accounts, and simplified approval and reporting requirements for non-trade transactions were made available to all companies. The effect of these reforms is that it is now simpler and easier to open foreign currency accounts as SAFE approval is no longer required.

Though extensively affecting ChinaÆs finance sector, the reforms also positively affect international trade flows, since shipping and logistics companies may now purchase foreign currency to make overseas payments for freight and related service fees. These companies may now also collect RMB from domestic customers, rather than only foreign currency, dramatically improving the efficiency of fee collections, as ChinaÆs RMB clearing system is far superior to its foreign currency counterpart.

Similarly, export companies now have more choice when paying freight charges and related service fees. Rather than route payments through domestic shipping companies, they now pay directly to the ultimate service provider, the overseas freight company.

Finally, these reforms give companies substantially more choices on collection channels and bank selection.

But the best is yet to come. Under ChinaÆs agreement with the World Trade Organisation, on 11 December 2006, geographic restrictions on local currency business for foreign financial institutions will be lifted. Foreign financial institutions licensed for local currency business in one region of China may service clients in any other region that is open to such business. RMB financing can be offered by licensed foreign banks all over the country. This further loosening will create more balance between buyers and sellers within the country, and a more level playing field, globally.

Citigroup China: Separating myth and reality

With Citibank branches in 103 countries, Citigroup leverages the strength of this network and expertise to provide up-to-date, first-hand world market information combined with a full range of trade solutions for financial institutions and multinational corporations.

Citigroup is a trusted advisor to regulators in China at all levels and a key member of numerous development teams. We work closely with regulators, market participants and intermediaries û with the aim of creating efficient domestic economies and expanding export capacity.

Our products and services cover the entire spectrum of financial services including overseas equity and debt capital markets, M&A advisory, onshore lending, cash management, trade finance, securities services, foreign exchange, derivatives and project finance.

Anticipating the changing trends in trade finance

The growing preference for open account versus letters of credit, on the part of large multinational companies importing from China, is driven by the same concerns, worldwide. Intense competitive pressures are forcing participants throughout the supply chain to improve their efficiency and drive down costs. As a result, the large multinational buyers no longer want to rely on a time-consuming credit facility using labor-intensive commercial letters of credit.

Today, these large multinational buyers are under constant pressure to improve margins and look for ways to extend their payables as far out as possible û which puts pressure in turn on their suppliers.

Facilitating and adding value to open account trade

CitigroupÆs solution is to buy the receivables from approved suppliers of the large MNC buyers û without the usual requirement for a letter of credit due to our long-term relationship with the buyer. In addition, a typical multinational buyer may have as many as 2000 suppliers. Traditionally that meant 2000 ôwindows,ö each one with its own bank, creating a virtual mountain of paperwork for the buyer. Today, once the account is entered in our streamlined electronic platform, any supplier û located anywhere in the world û with Internet access has 24 hour financing at their fingertips.

Furthermore, buyers enjoy better commercial rates with extended payment terms, better management of working capital and access to credit. Because we know the largest multinational buyers and understand the pressures of your business, it means weÆre comfortable û as your needs increase, our financing will grow at the same rate.

Finally, we provide important linkages at both ends of the trade chain. Through our local corporate client base in 17 Asian countries, we are your connection to small and midsize suppliers.

End-to-end business solutions

CitigroupÆs approach to trade finance is based on our strategy of delivering end-to-end solutions. We leverage our global organisation to provide a consistent level of support across the supply chain. In each case, the solutions we tailor are designed to keep pace with both the evolving market and the changing needs and focus of your business.

> Enhanced open account services
With CitigroupÆs Enhanced Open Account Trade processing, the buyer sends purchase order information electronically to Citigroup and the seller(s), which is entered into a database that enables the buyer to approve and pay invoices, and enables multiple sellers to track receivables and receive payment from Citigroup.

> Supplier finance
Supplier finance delivered through CitiConnect provides essential liquidity in the supply chain. Flexible and easy to use, CitiConnect is designed to handle multiple file formats. The platform can be programmed to link directly to the buyers computerised purchase ledger and or the suppliers sales ledger so that files can be automatically uploaded, reducing costs and eliminating errors.

> Accounts receivables financing
CitigroupÆs accounts receivables financing offers trade finance by purchasing and/or discounting receivables, represented either by bills or the sellersÆ invoices. A group of products that are tailored to meet individual requirements, the common goal of our receivables based finance is to turn receivables into quick cash, helping you finance production, generate more sales and reduce counterparty risk.

> Renminbi draft discounting
Renminbi (RMB) draft discounting provides cheaper, faster, and a more efficient financing than RMB loans, and is used where the buyer and seller are both in China. Under this programme, buyer pays sellers with endorsable drafts that are presented to banks for immediate discounted payment. Funds can be obtained in as little as one day thanks to clear laws, minimal documentary requirements, and simple processes.

Whatever business youÆre in, whether your company is a buyer of household appliances, a manufacturer of childrenÆs clothes or a distributor of auto parts, today all roads lead to China. The truth is the deeper you goùthe more you need to know. No one is better positioned to help you in China than Citigroup.
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