Of course, companies with an existing presence may already have a positive renminbi balance, but moving cash from one entity to another falls foul of Chinese rules that forbid corporates from making loans, even if the money is going to another part of the same group.

However, there are reports that a few multinationals have gained approval from the local regulators to use a rudimentary form of cash pooling. "It involved a lot of dialogue with the authorities and it was definitely a time-consuming process, but the company we advised thought that it was better to make the effort than to continue with the status quo," explains Jane Jiang, a Beijing-based senior associate with law firm Allen & Overy. Jiang refuses to identify the company in question, but General Electric has confirmed to Treasury & Risk that it is one of the handful of corporates involved in what appears to be a pilot scheme.

In most other respects, China's controls remain as strict as ever — for example, hedging the renminbi remain a major headache. "You can do forwards, swaps and options in other currencies as long as there is a genuine underlying exposure to be managed, but the renminbi is different. Any foreign currency transactions involving renminbi require a de facto currency conversion and that has an impact on monetary policy," says Allen & Overy's Jiang.

The solution favored by many foreign corporates is to use offshore markets instead. Banks in Hong Kong and Singapore are doing a roaring trade in non-deliverable forwards (NDF), which don't involve an exchange of different currencies but do allow treasurers to hedge against price movements by betting that the rate will rise or fall by a certain date and then, when the contract matures, settling the difference between the predicted rate and the actual rate in cash–so, treasurers who believe that the renminbi is going to rise have been seeking to offset the expected impact by entering into an NDF contract which would pay out if the currency does appreciate.

Unfortunately for corporate treasurers, it's becoming more and more expensive to put on this kind of trade, principally because there is no realistic prospect of the renminbi reversing direction against the dollar says Peter Wong, founding chairman of the International Association of CFOs and Corporate Treasurers, China (IACCT China): "That's making it more costly to hedge. Three months ago, buying renminbi forward already looked expensive–but now those rates would seem relatively cheap."

The alternatives are either untested or risky. One option is to look for a proxy hedge–a way of offsetting a renminbi exposure with a matching, reverse exposure to another currency. The key here is to find a currency which can be relied upon to closely mirror the behavior of China's currency.
Until recently, it had been relatively common to see corporates use the Malaysian ringgit as a proxy for the renminbi. Tim Pagett, a partner with PricewaterhouseCoopers in Beijing, says that this technique represents a viable alternative hedging strategy but he warns that proxy hedges can go horribly wrong if the relationship between the two currencies changes:

"You can do it. The science is there and the theory is there, but the problem you encounter specifically with the renminbi is that no other market really experiences the same level of government involvement in the finance sector, and the same sort of controls around convertibility. As a result, any correlation may just be temporary."
Banks in China are also actively trying to design products that meet local regulatory requirements and still offer some kind of renminbi offset. One avenue has been so-called "quanto" products, in which the underlying exposure is in renminbi but the payout is in an alternative currency. One new product which sprang up last year was the renminbi quanto swap, which was developed to address interest rate hedging needs, says John Thang, co-head of fixed income sales for northeast Asia with Standard Chartered Bank in Shanghai.

With interest rates rising six times during 2007, many corporates are looking for ways to cut their borrowing costs, but the onshore market in renminbi-denominated interest rate swaps has not yet opened up. Instead, the quanto swap allows treasurers a reduced renminbi borrowing rate if they take a view on an overseas interest rate as well: "It's a cost reduction product. We link the renminbi interest rate to overseas interest rate benchmarks like Libor and the client gets a reduced borrowing rate if certain conditions in those overseas benchmarks are met." Thang claims that only a few banks have been given regulatory clearance to offer such products and says that demand throughout last year was "overwhelming."

But the U.K. corporate's treasury executive is skeptical about the banking industry's endeavors: "Are banks offering viable alternatives? The answer is no. You can theorize all you like, but at the end of the day it's very, very difficult to get round the restrictions."

Those restrictions aren't limited to derivatives. Increasingly, foreign companies operating in China are facing a struggle simply to fund their businesses.

Bringing capital in from overseas is easy enough, but converting it into renminbi in order to pay local contracts is a bit like getting blood from a stone, treasurers complain–it's possible, but it takes time and requires documentary proof that the company has a specific renminbi need. "You can bring US dollars into China and keep them in a deposit account but there is no absolute certainty about when you'll receive approval to convert them into renminbi. So if you're doing a project in China, your planning needs to be incredibly strong," says the IACCT China's Wong.

The only other way of raising renminbi funds is to borrow locally. This, however, can get to be expensive, says one U.K. corporate's treasury executive: "The rate is 6.5% at the moment, and the very best rate you can get is 90% of that level."

Despite the restrictions, Standard Chartered's Thang argues that companies are unlikely to be dissuaded from expanding into China: "Multinational companies arriving in China may not be used to this highly regulated environment, but since many of them already have operations in other developing markets, they can understand the difference and prepare and manage it properly. The opportunities that China offers are so great that a lack of risk management tools will not be a deal-breaker for anyone."