The Payments infrastructure

A number of clearing systems and payment methods are commonly used in China. In-city payments are generally made by cheque whereas cross-city renminbi (RMB) payments are generally made by telegraphic transfer or demand draft.

The most commonly used payment instrument for RMB transfers within the same city is the local transfer cheque. Whereas company-issued cheques would be sent directly to the beneficiary and then presented through local clearing, local transfer cheques are delivered directly to the payer's bank, which then clears them through the local clearing house. The advantage here is that local transfer cheques do not need to be stamped with the company's finance chop and so the instruction can be sent electronically and the production of the local clearing cheque outsourced to the bank. An alternative payment method for in-city payments is the cashier's order which as a bank issued payment instrument can be credited to the beneficiary's account on sight.

Foreign companies operating in China face an additional challenge if their enterprise resource planning (ERP) systems do not produce Chinese language payments output files. This can result in significant manual intervention and rekeying to create payments files in Chinese. Banks can assist customers by building a link between the customer's ERP system and their electronic banking system if the latter has the ability to translate payment instructions into Chinese. HSBC's Hexagon system takes the instruction directly from customers' ERP systems and converts it into Chinese, at which point the payment is presented on screen for approval. The resulting SWIFT instruction is routed to the relevant partner bank for payment, reducing the end-toend payment cycle to 24 hours.

For cross-city payments, there are multiple channels, including the central bank-administered China National Automated Payments System (CNAPS) which spans 800 cities and provides access to cleared funds in one to two working days for the larger cities. However, the larger domestic commercial banks have developed efficient in-house clearing to clear between their own branches. For example, HSBC's strategic alliances with the big four state commercial banks (Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China) give customers access to over 26,000 branches via partner banks' real-time internal clearing. As a result, telegraphic transfers can now, in some cases, be cleared within two to three hours.

Receivables management

Given the complex range of clearing mechanisms described above, receivables management can present a challenge, especially if remote locations are involved. However, various solutions are available. If the collecting entity is based in an area (such as Shanghai and Guangzhou) where foreign banks are allowed to provide RMB services, alliances with domestic banks can be used to improve collection times. Any items that come in through the domestic banks' branches will be concentrated through the domestic banks' electronic systems and settled via a nostro account that the foreign bank maintains with a local bank.

Consolidated electronic reporting of these transactions is as important as the need to better manage the receivables cycle and this can be achieved via consolidated, timely electronic reporting of transactions via the foreign bank's electronic banking system. By assigning a unique transaction reference to each transaction and providing a file extract programme, banks can help customers to automate their reconciliation process within the customer's own ERP system.

Account and liquidity management

In the absence of a 'financial holding company' structure in China, transfers of funds between subsidiaries are subject to severe restrictions. Inter-company loans from the parent are subject to withholding tax. The interest rate environment is also regulated and margins charged or paid by banks are set by the central bank, resulting in wider spreads between deposit and lending rates than those found in more market regulated environments.

In early 2000, a system of 'entrusted loans' was introduced by the People's Bank of China for RMB funding. This has significantly improved opportunities for inter-company funding for groups with multiple operations in China. Entrusted loans allow related parties to lend and borrow from each other via a third party. An entity with surplus cash places a deposit with a bank and designates the company to whom the funds are to be lent. The rate is prescribed by the central bank by reference to the central banks' own lending rate and the intermediary bank is allowed to charge a fee within a specified range by the central bank. It is a central bank requirement that the credit risk is assumed by the lending entity. The ability to provide 'entrusted loans' was extended to foreign banks in November 2001.

Another regulation with cash management implications is the requirement for companies to hold only one RMB account. From an accounting perspective this can present issues for those corporates which normally use multiple accounts to handle divisional accounts or create separate accounting records for payables and receivables, often for ease of reconciliation.

Certain foreign banks have developed services which enable clients to monitor their consolidated account position via a central account. The different divisions would then have associated accounts enabling the overseas parent (and the company financial controller), for example, to maintain separate records of payables and receivables.