She cited, for example, the fact that within the Shanghai Free Trade Zone, there is no longer a cap on the interest rates paid on foreign-currency deposits of less than $3 million. “The market was hoping for the same on RMB deposits, but that has not happened yet,” she said.

In another development, companies doing business within the free trade zone no longer have to get approval from the State Administration of Foreign Exchange to convert U.S. dollars into RMB in order, say, to build a factory. “Your capital account in U.S. dollars has been freed up, and you can convert that to RMB at will for appropriate transactions,” Lodge said.

The ceiling on the total capital that one business unit can loan to another unit of their company located outside of China was boosted to 50% for those operating in the free trade zone, from the 30% ceiling imposed on companies in the rest of China.

And in a development of particular interest to corporate treasuries, China has made cash pooling easier. Companies can use an RMB-denominated intragroup cross-border sweep to connect funds held within China, but outside of the free trade zone, with a global cash pool that their company operates outside of China via a designated account within the zone.

“This is going to give multinationals with a lot of currency movement and an existing cash pool the ability to incorporate their Chinese entities into the global cash pool,” said Lodge, pictured at left.

The changes being piloted in the free trade zone touch on many aspects of doing business in China. For example, customs processes are being streamlined and electronic filing introduced. Employees of companies operating in the free trade zone may remit their entire salary outside of China, while workers in the rest of China are limited to sending a maximum of $50,000 a year out of the country.

And Lodge said the March announcement by China's central bank, the People's Bank of China (PBOC), that the nation is launching a deposit insurance program to be introduced first in the free trade zone is a huge step toward the liberalization of the currency. Currently China has no insurance plan for funds held in banks.

A Physical Presence in the Zone

To take advantage of the pilot programs offered within the Shanghai Free Trade Zone, companies must have a physical presence in the zone and have an account with a designated bank, Lodge said. HSBC opened a branch in the zone in January, “specifically for Shanghai Free Trade Zone business,” she said.

At this point, the free trade zone is advantageous for the biggest players, Lodge said. “If you are a multinational and you have a lot of transactions going through your accounts daily, then you should consider having a presence in the zone,” she said. “But realistically, right now there are few companies at that level.”

She predicted, though, that in six months' time, regulations could evolve to the point where having a presence within the zone could be worthwhile for companies doing fewer transactions.

“China has increasingly liberalized regulations with the aim of creating a much more competitive financial and cross-border environment,” Kris Drake, head of corporate sales for China in Bank at America Merrill Lynch, wrote in an email. “The Free Trade Zone itself has been a source for many of the financial liberalization moves that have occurred over the last few months.

“For multinationals with complex businesses in China, the result is to allow more centralization of their financial activities, which better satisfies their desire for rationalization of accounts, efficiency, automation, visibility, and control,” Drake added. “We certainly find that our clients who operate shared service centers are able to bring more activity within scope, regardless of whether these are operated within China or outside.”

The establishment of the Shanghai Free Trade Zone last September followed changes that the PBOC announced last summer, including the RMB cross-border loan, a new structure that makes it easier for companies to make use of excess cash they have accumulated in China.

The RMB cross-border loan structure has been “very popular with corporates that are established in China and have been building up profits, and historically could not reallocate to other parts of their organization,” Lodge said. She noted that previously, the only way to repatriate cash held in China was to declare a dividend, which is subject to taxation in both China and the U.S.

FX Volatility

Amid the regulatory changes, the Chinese renminbi—which had gained steadily against the U.S. dollar in recent years—weakened dramatically earlier this year. And in March, the PBOC widened the band in which the RMB trades against the dollar from 1% to 2%.

Alfonso Esparza, senior currency analyst at Oanda, argued that the RMB's retreat reflected both the financial liberalization that is taking place and concerns about the state of China's economy.

The wider trading band gave FX market participants more room to maneuver, he said. Use of the Chinese currency has grown to the point where it's now a top-10 currency, Esparza noted. Given the growing amount of business being done in RMB and the greater convertibility of the currency, the increased volatility makes sense, he said.

Meanwhile, the Chinese manufacturing sector has seen its growth slow. Esparza said part of the RMB's weakness reflects the PBOC's effort to give exporters a break and try to bolster the economy.

HSBC views the January and February volatility as a PBOC test of the consequences of the widening it announced in March. “If we want additional FX liberalization, we have to accept the two-way volatility, and that's exactly what we're seeing now and will see going forward,” Lodge said.

Given the recent depreciation, she is seeing more queries about hedging programs. “A lot of people were previously not considering this,” Lodge said. “However, the volatility we are now experiencing is causing treasurers and CFOs to reconsider.”