Cash pooling in China: how it works and what the options are
Where a cash pool is largely a banking product in most European countries, in China it is also a regulatory arrangement. Cross border flows are subject to capital account controls, and lending between group companies is limited by quotas linked to each entity's balance sheet. A group therefore files its cash pool with the authorities, and the bank running the pool operates it within the approved limits.
This note sets out how such a pool is structured, what it can be used for and which options are available.
Structure
A cash pool is run by a lead enterprise, which must be a Chinese legal entity and is responsible for the filing, the reporting and the contact with the regulators. It can borrow or lend on its own account, or act as agent for the other members.
All pool flows go through a domestic master account at the bank operating the cash pool structure. RMB and foreign currency are held in the same account.
Members can be domestic or overseas companies, including branches. They need a direct or indirect shareholding link with the lead enterprise, or a common parent. A pool requires at least three members.
Quotas determine what a pool can actually do, as each Chinese entity has a limit on what it can borrow from abroad and on what it can lend abroad, both linked to its equity. Within a pool, each member decides what share of these quotas to centralise with the lead enterprise. The allocated share can be adjusted once a year and the remainder stays available to the member itself.
What a pool can be used for
A profitable subsidiary with surplus cash and spare borrowing capacity can use the pool to finance a new plant that has little borrowing capacity of its own. Separately, it can lend its surplus cash offshore, within the overseas lending quota.
On the trade side, the lead enterprise can collect and pay current account items for the domestic members and net intercompany positions with overseas members. Netting must take place at least once a month. For groups with substantial intercompany invoicing, this reduces the number of payments and the amount of cash in transit.
FX conversion for trade, direct investment, external debt and overseas lending can also be handled through the master account. Capital account receipts can be used without item by item supporting documents upfront, provided the company confirms that the underlying transactions are genuine. The negative list on the use of these funds still applies.
Sweeping
Automatic sweeping is possible. The regulation determines which flows are allowed and up to what amount, and the bank provides the automation. Target balances, timing and direction are agreed with the bank operating the cash pool.
Any cross border sweep that creates a loan to or from abroad counts against the centralised quota. The reporting obligations remain with the lead enterprise, even when transfers are automated.
Options
China currently runs two programmes, the General version and the Integrated (high) version:
| General version | Integrated (high) version | |
|---|---|---|
| Aimed at | Mid sized groups | Large groups |
| Size test | Cross border flows of RMB 700m, or domestic revenue of RMB 1bn plus overseas revenue of RMB 200m | Cross border flows of RMB 7bn and domestic revenue of RMB 10bn and overseas revenue of RMB 2bn |
| Free trade zone lead enterprise | Lower thresholds | n/a |
| Main scope | Flows between Chinese and overseas group companies | Also payments between overseas members and overseas third parties |
The lower threshold applies where the lead enterprise is registered in a free trade zone. In practice this matters most for mid sized groups that fall just below the general version’s size test. If the group already has an entity in a free trade zone that can act as lead enterprise, the pool may come within reach without any change to its underlying flows.
For most European companies the general version will be sufficient. It covers quota pooling, netting and centralised FX conversion. The revenue test is relevant for manufacturers that produce and sell mainly within China. Their cross border flows can be relatively small, even when the China business itself is substantial.
The integrated version offers more flexibility and higher transfer ceilings. It also allows the Chinese lead enterprise to handle certain trade payments between overseas members and their overseas counterparties, which makes it possible to run a regional treasury centre out of China.
For good order, a group can in principle operate only one cross border pool.
Not having a pool is also an option. With one or two Chinese entities, each company can manage its own cash and dividends without much difficulty. As the number of entities grows, so do the administrative burden and the amount of cash held locally.
Conditions
Beyond the size tests, the group must show a genuine business need and have adequate internal controls and systems. Members that trade in goods must hold SAFE's Category A rating, which means their foreign exchange flows have matched their customs data without problems. The group should also have no material cross border violations in the past two years.
After filing, the lead enterprise and the bank must keep supporting documents for five years. A change of bank, lead enterprise or quota requires an update of the filing within 30 days. A change of members that does not affect the quota is reported to the bank within the same period, which is especially relevant for acquisitions and disposals.
Design questions
The design usually comes down to a few questions:
Which entity should act as lead enterprise: an investment company, a sales company or a free trade zone entity?
Is the pool primarily meant to fund growth, or to simplify intercompany payments?
Should joint ventures or companies with minority shareholders be included?
How will intercompany balances be priced and approved?
Let's talk
For European corporates with several entities in China, this is worth looking into. Happy to discuss what it means for your specific setup.
This note is for information only and does not constitute legal or financial advice. Please verify current requirements with your bank or the local SAFE branch.
