1. Cash Management Solutions in the China Market Possibilities & Best Practice
Beijing - Shanghai - Guangzhou - Hong Kong- Shenyang – Chengdu - Wulumuqi
(8610)
(8610)

2. 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

3. 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

4. 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

5. The Collection Cycle

6. (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

7. 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

8. 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

9. 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

10. 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

11. 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

12. The Payments Cycle
Banks

13. 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 -->

14. 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

15. 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

16. 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

17. 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.

18. 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.

19. Cost/Benefit of a Bilateral Entrustment Loan
Liquidity Management
Cost/Benefit of a Bilateral Entrustment Loan
Costs
Stamp duty % 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

20. 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

21. 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

22. 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

23. 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