For companies wanting to conduct business in China, understanding how the local banking system operates is critical to structuring and managing treasury functions effectively. This guide highlights ten key concepts and common banking practices for managing business in China. While not exhaustive, it offers essential insights to help you get started.
1. China’s Banking Operations Decentralized with Differences in Regional Policies
The local bank hierarchy in China is structured in the following tiers (from the top down): Headquarters oversees branches at the city and/or provincial level (similar to regional offices in the U.S.), which manages sub-branches (similar to U.S. branches).
“One key difference compared to the U.S. structure is the decentralized nature of banking operations,” said Grace Zhu, Chief Representative, PNC’s Shanghai Representative Office. “Because each sub-branch has its own relationship team, operations and customer service group (i.e., not centralized), the knowledge and customer experience may vary — even within the same bank.”
Additionally, the implementation of certain banking regulations and/or bank policies may differ between regions, leading to scenarios where certain services can be offered in some regions’ branches but not in others. Therefore, companies wishing to develop local banking relationships may need to evaluate the bank’s suitability based on the specific branch’s knowledge and service capability, in addition to the bank’s overall capability.
2. Five Common Account Types
There are various types of accounts in China that companies need to be familiar with, and it’s important to be aware of how each account type operates. The most common account types used by companies are:
- Basic Deposit Account in Renminbi (RMB): Allows for cash deposits, withdrawals and payments, including salary and tax payments. Due to People's Bank of China (PBOC) regulations, a company can only have one basic account with one bank.
- General Account in RMB: Allows payments and cash deposits, but cash withdrawals are not permitted. There is no limitation on the number of general accounts that a company can have.
- Capital Account in RMB and Foreign Currencies: Can be used to receive capital injections from investors registered overseas, as well as payments under current items and capital items approved by regulators.
- Settlement Account in Foreign Currencies: Can be used for paying and receiving imports/exports of goods/services and income from abroad, as well as current transfers (such as donations). Cash withdrawals are allowed, but usage is restricted (e.g., for overseas travel expenses).
- Specialized Account: Opened for a designated purpose, such as to fund projects, borrowing overseas and intercompany lending or borrowing.
3. Three Non-Resident Account Types
There are three types of non-resident accounts in China: OSAs (offshore accounts, not available for RMB), NRAs (non-resident accounts) and FTAs (free trade accounts).
NRAs can be set up by companies registered overseas, whether the foreign company resides overseas or the Chinese company’s subsidiary resides overseas. For Chinese companies with overseas subsidiaries, the NRAs can help provide a link to onshore and offshore entities and related resources. NRAs and FTAs are available in RMB and foreign currencies.
In addition to NRAs, companies may also consider multicurrency accounts offered in their home country that provide many similar benefits. For example, PNC offers multicurrency accounts in the RMB currency for clients who wish to conduct payments in RMB with trading providers while still enjoying the features and benefits of a U.S.-based account that’s integrated with PINACLE®, PNC’s top-rated corporate online and mobile banking platform.
4. Documentation Required for Cross-Border Transactions
Banks in China generally require China-based companies to provide supporting documentation to verify a cross-border transaction’s authenticity — whether it’s settled in foreign currencies or RMB. Regulatory requirements for cross-border transactions involving China are not fully open and therefore require bank verification.
Required documentation may differ depending on the transaction type, amount, regulatory rules, local regulator’s interpretation and implementation of the rules, the bank’s own requirement, etc. Domestic payments within China (China-to-China) typically do not require supporting documentation.
5. Local Payment Practices
While many payment practices are similar to those in the U.S., companies operating in China need to be familiar with some of the local payment practices, such as the use of CNAPS (China National Advanced Payment System).
CNAPS comprises two core subsystems:
- High-Value Payment System (HVPS), which is real-time settlement to handle large-value, time-critical transactions — similar to Fedwire in the U.S.
- Bulk Electronic Payment System (BEPS), which batch processes high-volume, low-value transactions, similar to Automated Clearing House (ACH) in the U.S.
6. Cross-Border Payment Practices
In China, there are many ways to finance imports. The most common are letters of credit and documentary collections.
Letters of Credit (LC): An LC is a commitment by the issuing bank to pay the beneficiary in accordance with LC terms. It can help mitigate the buyer’s payment risk and increase sales potential.
Most Chinese commercial banks have the authority to issue both commercial (import) LCs and standby LCs. Foreign banks with a branch office in China can also issue letters of credit.
Two common types of letters of credit:
Standby LC - a passive payment instrument
Commercial LC - an active payment instrument
Documentary Collections: Unlike LCs, which are a commitment by the issuing bank, documentary collections primarily involve customer payment risk and are less secure than LCs. The most common payment options under documentary collections are documents against payment (D/P) and documents against acceptance (D/A).
7. Borrowing Practices in China
Even though banks in China provide a wide range of financing products, it can be difficult for a U.S. company to obtain a line of credit from a Chinese bank. The bank may require collateral to cover its financing to the borrower. Depending on the borrower’s credit rating, the collateral may need to equal a certain percentage of the financing amount.
The most accepted collateral types are cash deposits, land, real estate, and standby LCs issued by a bank. Unlike in the U.S., banks in China are less willing to accept equipment and inventory as collateral. Although accounts receivable (AR) can be used for financing, there are many restrictions when banks provide financing against AR.
8. Two RMB Currency Markets: Onshore and Offshore
There are two currency markets for the RMB — the onshore RMB market and the offshore RMB market. The onshore RMB market refers to RMB traded and transacted in mainland China (excluding Hong Kong, Macau, and Taiwan). Offshore RMB refers to all markets outside of mainland China, with Hong Kong being the most active. Other notable offshore RMB centers include London and Singapore.
The onshore RMB (CNY) market has a managed foreign exchange rate and its own interest rate market. Companies within the onshore environment can conduct foreign exchange transactions and cross-border payments in RMB in a managed environment where current-account transactions are relatively open and capital transactions are more restricted.
The offshore RMB (CNH) market has a free-floating foreign exchange rate and its own interest rates market, which may differ from the onshore market. Foreign exchange and cross-border payments in RMB can be conducted freely without restriction.
9. Developing Fintech and Central Bank Digital Currency
China is a global leader in electronic payment coverage and volume, especially mobile payments. Giants like Alipay and WeChat Pay revolutionized payments, enabling cashless transactions for over a billion users. This includes consumers and corporates (especially B2C) in China and has also expanded out of mainland China. Beyond payments, platforms such as Ant Group and Tencent have also expanded into lending, wealth management, and insurance, creating a robust digital finance ecosystem.
With the development in technology and widespread use of digital payments, many central banks have increased efforts in the research of a central bank digital currency (CBDC). China is one of the countries leading the development of a digital fiat currency, e-CNY. Because it is issued by the central bank, e-CNY is legal tender with the same status as physical RMB.
10. Evolving Local Banking Regulations
Chinese regulators continually evolve their management of the banking sector, so banking regulations in China may change frequently. As a result, companies may find that their banks change the requirements for their business due to changes in regulations.
“Companies should monitor regulatory changes in China and remain flexible in case new rules affect banking services,” said Zhu.
Let’s build your brilliant
Established in 2008, PNC's Shanghai Representative Office (SRO) is available as a resource to PNC clients who are doing business with China or in China. The SRO can provide assistance and guidance on:
- Corporate Establishment
- Obtaining Local Banking Services
- Market Information
- Introductions to Local Resources
U.S. companies exploring Chinese banking solutions can contact their PNC Relationship Team or visit pnc.com/international.
