In August 2013, the Chinese regulators gave the city of Kunshan in Jiangsu province the go-ahead to launch a series of cross-border RMB pilots between the Mainland and Taiwan. Here, we focus on how this important initiative has unlocked new opportunities for Taiwan-based corporates based in the Kunshan Experimental Zone.

In September 2013, Kunshan President Enterprises Food Company Limited became the first company to complete a two-way RMB cross-border intra-group lending transaction between Taiwan and China. This milestone transaction took place as part of the pioneering Kunshan RMB pilot programme, which is designed to streamline the two-way flow of RMB funds between the Mainland and Taiwan.

Conducted through HSBC, the set-up involved gaining approval for a two-way intra-group lending quota totalling RMB1.49 billion using a master account. In the first transaction, RMB10 million was transferred to this master account from its related overseas company.

As a subsidiary of the Uni-President Group, Kunshan President has a long-standing relationship with China. It first entered the Mainland in 1992 and since then it has invested in around 50 companies, primarily in the food industry. Today, it is one of the largest operating entities in the Uni-President Group, with an annual sales turnover of over RMB2.2 billion and a net worth of RMB978 million in 2013. It is also the sales and distribution arm for beverages and instant noodles sold under the Uni-President brand in Eastern China. As such, it plays a strategically vital role when it comes to expanding the group’s penetration in the Mainland.

With its rapid business growth in China, Kunshan President continues to have a strong demand for RMB fundings. But, it has faced significant challenges when its parent company needed to transfer funds from Taiwan to China. The complexities of the regulatory approval process and tight controls over foreign debt quotas meant that before cross-border intra-group lending opened up, funding into China was primarily conducted via capital injection or shareholder loans. Consequently, Kunshan President was not always able to obtain sufficient and timely funding to support its operational activities or investment plans in the Mainland.

Similarly, Kunshan President also had very limited channels to repatriate its surplus funds out of the Mainland. Its options were confined to trade settlements or annual dividends. As a result, Kunshan President was unable to use its surplus funds to support funding shortages in its affiliated companies offshore.

What’s more, some Uni-President Group entities doing business in China still needed bank loans to support their day-to-day operations – and the borrowing costs were high.

In fact, these are common challenges for many other multinational corporates in China, and not limited to Taiwanese corporates.

New options

Thanks to the launch of the Kunshan pilot programme, Taiwanese corporates can now resolve such challenges with new options and opportunities. The benefits are significant. Under specific one-off approval, Kunshan President can now move its RMB funds between offshore and onshore within the approved quota. No additional

A new chapter in China-Taiwan economic cooperationThe Kunshan Experimental Zone

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“HSBC’s services will

enable Uni-President

to more efficiently use

RMB funds from its

member companies

in mainland China

and overseas.”

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administrative process is required for individual transactions. This saves a great deal of time and effort, freeing up management to focus on other value adding activities.

At the same time, when required, Kunshan President can also access funding support from other Uni-President affiliates overseas instead of having to rely on costly onshore bank loans. The switch from external to internal funding has reduced financing costs significantly – in this case, by 30% – and greatly improved operational efficiency.

Strategic context

These improvements are exactly the type of benefits that the Chinese authorities intended to achieve under the pilot programme. Indeed, it is important to place the Kunshan Experimental Zone in its wider strategic context. Similar to the Shanghai Free Trade Zone (SFTZ), it is part of the Chinese government’s intensifying efforts to reform the country’s financial systems and transform the national economy through liberalising and globalising the RMB.

These initiatives come at a crucial time for the currency. Although RMB only joined the list of internationally tradable currencies within the last five years, it is now the seventh most traded currency in the world and ranks second when it comes to trade financing. Recently, however, the Chinese economy has showed signs of slowing for the first time in over a decade. The Kunshan Experimental Zone and the SFTZ are specifically designed to reverse this trend by boosting trade and creating new business opportunities.

Kunshan, in Jiangsu Province, was chosen to host the RMB pilot programme on the strength of its thriving economy and its long-standing relationship with Taiwan-based businesses. At present, there are around 7,000 Taiwanese corporates registered in the city. The city’s relationship with Taiwan is so strong that Kunshan is known as ‘Little Taipei’. Its capital intensive and export-led economy relies heavily on continuous foreign direct investment and exports.

“The switch from

an external funding

model to an internal

funding model has

significantly reduced

costs, enhanced the

company’s use of

internal surplus cash

and boosted operational

efficiency.”

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Clear objectives

The Kunshan RMB pilot programme has two clear objectives: to further enhance the use of the RMB offshore, specifically in Taiwan; and to encourage RMB flows between onshore and offshore markets.

Among other benefits, two-way cross-border intra-group RMB lending enables corporates to:

• mobilise their onshore and offshore RMB funds more efficiently with greater flexibility;

• optimise group liquidity management to reduce external borrowing and improve return on capital.

This innovative initiative also makes establishing cross-border RMB cash pools a feasible proposition.

In addition, the benefits of the Kunshan pilot programme are not limited to corporates. HSBC recently completed its first cross-border RMB remittance for an individual under another pilot initiative approved for the Kunshan Experimental Zone. In this case, the bank helped an overseas resident in the zone transfer RMB positions to his RMB account in Taiwan. This cross-border RMB remittance service, under the personal current account, provides greater convenience to Mainland residents, Hong Kong, Macau and Taiwanese customers, as well as foreigners, in the pilot zone with cross-border remittance needs.

The new services trialled in the Kunshan Experimental Zone provide a channel for the repatriating Taiwanese corporates’ fast-growing RMB surpluses while offering new opportunities in RMB services for banks in Taiwan. As a result, Taiwan’s emerging offshore RMB market has received a boost and the new policy will make cash management more convenient and efficient for Taiwanese companies.

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Comprehensive solution

Kunshan President was advised about the new service by HSBC, its core bank, shortly after the official regulation announcement. The corporate has been banking with HSBC in Taiwan since the 1990s. When it expanded into the Chinese market, it also established a relationship with HSBC China in 2006. Among other services, HSBC has provided working capital support to the group’s subsidiaries in the Mainland.

In this case, HSBC helped facilitate communication between Kunshan President and the Kunshan People’s Bank of China (PBOC). The bank also presented a detailed analysis of the pilot programme’s pros and cons to Kunshan President and its parent in Taiwan, as well as a detailed implementation plan. Overall, HSBC’s efforts gave Kunshan President an increased comfort level and confidence in adopting this new solution.

Established trend

Looking ahead to how the Kunshan pilot programme might shape the future of China’s business landscape, the gradual opening up of the country’s economy is likely to become an established trend and the flexibility of cross-border fund movements is likely to be replicated nationwide. This will enable more entities across China to enjoy the same benefits as Kunshan President.

As a sector leader in the Chinese market, the Uni-President Group is glad to have played a role in the country’s recent financial reforms. It will continue to work closely with HSBC to monitor developments and stay abreast of any new initiatives that will further improve its management of group cash.

Kunshan at a glance

• Registered population 680,000• Area 921.3 sq km• Heads the list of Top 100 Best Developed

County-Level Economies in China• First county-level city with a GDP exceeding

200 billion yuan• Significant local industries include electronic

information, precision machinery, fine chemicals, digital products, software, semiconductors, and communication equipment

• Holds numerous awards including Excellent Tourism City of China, National Garden City, National Model City of Environment Protection, and National Hygiene City

C H I N A

Kunshan Shanghai

Hong Kong

Beijing

Taiwan

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