A recent agreement by the People's Bank of China ("PBC") has expanded a critical process for conducting business in China: currency settlement. On March 12, 2009, the PBC declared a foreign exchange payment arrangement (hereinafter referred as to the “Arrangement”) between mainland China and Hong Kong in conformity with the Memorandum of Foreign Exchange Payment Arrangement between achieved by the PBC and the Hong Kong Monetary Authority (“HKMA”). The Arrangement was executed on March 16, 2009.

The Arrangement was followed by an April 8, 2009, announcement by the China State Council that five cities, Shanghai, Guangzhou, Shenzhen, Zhuhai and Dong Guan, would launch cross-border RMB settlement pilot programs soon.

Background

Prior to execution of the Arrangement, China domestic banks typically opened foreign exchange accounts with foreign banks to conduct cross-border foreign exchange payments due to the weak networks and small size of China domestic banks. Under the Arrangement, the payment clearance systems of China domestic banks will directly connect to their designated agent banks or branches in Hong Kong. This allows businesses more options in determining the best means of currency settlement in China.

Major Point

The Arrangement designates certain mainland banks, the China Construction Bank (“CCB”), the Industrial and Commercial Bank of China (“ICBC”), the Bank of China (“BOC”) and the Shanghai Pudong Development Bank (“SPDB”), as agent banks for Hong Kong dollars (“HKD”), Euros (“EUR”), U.S. dollars (“USD”) and British pounds (“GBP”) respectively. In Hong Kong, the Hong Kong Branch of CCB, ICBC (Asia), BOC (Hong Kong), and Citibank (Hong Kong) are agent banks for aforementioned currencies respectively.

Moreover, the Shanghai Branches of both the Bank of Communications and the BOC would be involved in the cross-border RMB settlement pilot programs. Detailed regulations that will allow outbound foreign enterprises to open RMB accounts in the offshore branches of these designated agent banks are expected shortly. While the content of these regulations is unknown, there is significant potential that they will expand the options available to outbound foreign enterprises for processing currency settlement..

Conclusion

These developments appear to be a follow through on the findings of the 2008 China Payment System Development Report (2008) released by PBC (hereinafter referred as to the “Report”). The Report underlined the commitment of China's central financial government to foster the negotiation and cooperation of international payment systems. The Arrangement and the pilot programs will significantly increase opportunities for cross-border settlements and international payments by foreign enterprises. Very good news for foreign companies interested in developing their relationship with China.