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The Collection Cycle - Tips and Best Practice Contents The Collection Cycle - Tips and Best Practice The Payments Cycle - Tips and Best Practice Liquidity Management - Tips and Best Practice

What Are Your Options For ETF Settlement in China? The Collection Cycle What Are Your Options For ETF Settlement in China? A. PBOC China National Payments Network (CNAPS) B. Settlement through traditional channel of local and/or foreign banks’ internal branch clearing networks

An Overview of CNAPs The Collection Cycle The only nationwide, independently run EFT clearing network in China Point-to-point direct transfers running on PBOC-maintained, reliable settlement system; over 20,000 direct clearing members Based on SCB client experience, 80% of the transfers arrive within 24 hours Same day arrival between CNAPS direct clearing memebers Extended network coverage based on all member banks’ geographic locations One standard remittance instruction for customer’s buyer to remit fund, ease customer sales office administration NOTE: upgraded CNAPS to be introduced in 2003

The Collection Cycle

(A) Same day transfer (T+0) PBOC Settlement System Member hub (A) Same day transfer (T+0) (B) Take 0.5 to 1 day A - Payor account at local bank branch that is PBOC eLink member hub B - Payor account at local bank branch that is not PBOC eLink member hub, I.e. sub-branch at remote area or small village - Collection takes total 1.5 days up to longest 2 days

PBOC CNAPS Member Hub Statistics ‘Big 4’State-owned Banks Minsheng SPDB Hua Xia CN Everbright Fujian Industrial SZDB CMB GDB CITIC BOCOM. 1727 3503 4102 1988 3743 1446 573 1687 684

The Collection Cycle Summary of Traditional Channel - Routing Through Banks’ Internal Clearing Systems Historically, the key reason for delays in remittance process due to need to ‘settle’ between at least 2 banks internal clearing systems Large local banks nationwide internal branch clearing networks effectively operate as ‘separate national clearing networks’ Currently, can consult with your Banking Partner on how to leverage on the local banks’ extensive network to your advantage

Tips for Best Practice in Routing Customer Payments The Collection Cycle Tips for Best Practice in Routing Customer Payments Undertake a ‘PAYER BANK ANALYSIS’ with your Bank partner Your Bank partner will help select a the payment route that will result in the quickest settlement time Your Bank partner will also assist in communicating any change in payment routing to your customer base This systematic approach to reviewing payer behavior will ensure that your EFT collections are routed in the most efficient manner possible

Issues Faced in Processing Payments - In Brief The Payments Cycle Issues Faced in Processing Payments - In Brief How to facilitating payments processing via electronic banking platforms Facilitate remote authorization Secure authorization environment Centralized payables processing 3rd party bank payments initiation Trend toward establishing ‘shared service centres’ for payments processing for multiple legal entities in China

Tips for Best Practice in Processing Payments The Payments Cycle Tips for Best Practice in Processing Payments Choose a Bank partner in China to provide robust e-banking platform that accommodates: Complex authorization matrix capabilities Remote payment authorization Chinese language capabilities Automated reconciliation with internal AP system 3rd party bank payment initiation

The Payments Cycle Banks

Liquidity Management Corporate Structure Issues - Use of Holding Company as Re-Invoicing Centre China Holding Company Subsid A Subsid B Subsid C 3rd party customers Inter-co sales --> 3rd party sales -->

Reinvoicing Centre Cont’d Liquidity Management Reinvoicing Centre Cont’d Holding company as distribution agent (MOFTEC approval required, K over RMB30 mio.) Distribution subsidiary, often with sales function. Can centralize collections Raise cheap funding through discounting commercial drafts Can iron out cash imbalances by offering preferential terms to factories in need, but amount and tenor restricted Tax impact - VAT and income tax

Banks Reinvoicing Center Re-invoicing centre Factory B Factory C Factory A Customers Term payment Suppliers Commercial draft Pref. deposit Credit line drawdown Discounting without recourse Advance payment Banks

Sweeping Techniques Liquidity Management In many cases, MNC will have multiple sales branches scattered throughout China, collecting sales proceeds locally. This results in numerous issues, including: idle balances left in branch accounts; delayed transit of funds to HQ ‘concentration account’ manual compilation of bank account reports; management time/effort managing multiple bank accounts with different banks; inadequate ‘central’ control over branch bank accounts

Sweeping Techniques Liquidity Management These issues can be addressed via establishing a sweeping structure Brief mechanics of this structure as follows: All branch offices open collection accounts with one foreign bank. Where branch office is located outside permitted scope of foreign bank’s RMB business, foreign bank arranges for branch to open collection accounts with partner local bank. A minimum branch account threshold is set by HQ (could be zero balance), and foreign bank monitors balances on pre-set basis. Where funds in branch accounts exceed minimum amount, automatically swept to the HQ concentration account. Comprehensive reporting on collections is provided for improved management information and control.

Pooling of Funds - Bilateral Entrustment Loans Liquidity Management Pooling of Funds - Bilateral Entrustment Loans Entrustment loans effectively allow inter-company financing activities by routing the transactions through a financial institution (as ‘entrustment loan agent’). Bilateral entrustment loans are a simple and effective tool to use when group has: one entity with consistent levels of surplus cash, and other entity(ies) that are borrowing from banks. one entity with stable level of bank borrowings, and other entity(ies) with consistent levels of surplus cash ‘Bilateral’ means individual entrustment loans signed between the Corporate Lender and the Corporate Borrower for each entrustment loan transaction.

Cost/Benefit of a Bilateral Entrustment Loan Liquidity Management Cost/Benefit of a Bilateral Entrustment Loan Costs Stamp duty - 0.015% of principle amount Business tax on interest earned by cash surplus entities - 5% Trust loan fees Benefits Immediate reduction in loan interest paid to banks for working capital requirements Improvement in yield on surplus cash for lending party

Pooling of Funds - “Virtual Pooling Structure” Liquidity Management Pooling of Funds - “Virtual Pooling Structure” When to use vs. bilateral entrustment loan? When group has BOTH multiple cash surplus and cash deficit entities spread around the country Benefits groups of companies with net working capital requirements Reduces borrowing costs at individual and overall group level Pockets of excess cash better remunerated at individual and group level

Virtual Pooling - Implementation Liquidity Management Virtual Pooling - Implementation Participating entities and bank enter into master entrustment loan agreement Transfer funds from cash rich to cash poor entities through a designated Pool Header At any one time only the exact amount required can be borrowed by the operating entities from the Pool Header Pool Header enjoys beneficial conditions on credit line and more flexibility to invest excess cash Backstop line of credit provided to pool participants to ensure liquidity available at all times

Operating a Virtual Pool Credit line drawdown (can be made interavailable to all participating entities) Co 1 Co 2 Co 3 Co 4 Co 5 Cash > Threshold Cash < Threshold Trust loan drawdown Trust loan + interest repayment Company 6 (pool header) Pool manager Banks

Cost/Benefit of a Virtual Pool Liquidity Management Cost/Benefit of a Virtual Pool Costs Stamp duty - at least 0.015% of principle amount (assuming 3 parties to the entrustment loan agreement) Business tax on interest earned by cash surplus entities - 5% Trust loan fees Arrangement fees Individual drawdowns and repayments are exempted from stamp duty Benefits Reduction in loan interest paid to banks for working capital requirements