For any companies that are new entrants or looking to do business in China, understanding the differences and nuances of banking in China can help your treasury team better manage your banking structure.

This whitepaper focuses on 10 top concepts and common banking practices that treasury practitioners whose companies are conducting business in China should know about. While this is not an exhaustive list, the aim is to provide an overview and some of the essential knowledge to get started.

1. Local Banking Structure in China 

In China, there is one central bank (People’s Bank of China), three policy banks (China Development Bank, the Export-Import Bank of China and Agricultural Development Bank of China), five state-owned commercial banks (also called the “big five” banks, which are Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Industrial & Commercial Bank of China), and 12 joint-stock commercial banks, as well as city commercial banks, rural commercial banks and foreign banks.

The local banks’ hierarchy in China is structured in the following tiers (from the top down): The bank headquarters oversee the branches at either the city and/or provincial level (equivalent to the bank regional offices in the U.S.), which manage the sub-branches (equivalent to a branch in the U.S.).

A difference compared to the U.S. structure is the decentralized nature of banking operations. Because each sub-branch has its own relationship team, operations and customer service group (i.e., not centralized), the expertise and the customer experience of each sub-branch may not be consistent — 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 certain regions’ branches and not in others. Therefore, companies wishing to develop local banking relationships should evaluate the bank’s suitability based on the specific branch’s expertise and service capability, in addition to the bank’s overall capability.

2. Account Types 

There are various types of accounts in China with which companies should be familiar, and it’s important to be aware of how each account type operates. The most common account types used by companies are as follows:

  • Basic Deposit Account in Renminbi (RMB) — Allows for cash deposits, withdrawals and payments, including salary and tax payments. A company can only have one basic account overall due to People’s Bank of China (PBOC) regulations. This is the only account type from which cash can be withdrawn. Each company can establish only one basic account with only one single bank. 
  • General Account in RMB — Allows for payments and cash deposits, though cash cannot be withdrawn from a general account. 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 can be made through this account; however, how the withdrawal can be used is limited (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.

PNC offers multicurrency accounts in the RMB currency for clients who wish to conduct payments in RMB with their trading partners while still providing the features and benefits of a U.S.- based account that’s integrated with PINACLE®, PNC’s top-rated corporate online and mobile banking portal.

3. Non-Resident Accounts

There are three types of non-resident accounts in China: OSAs (offshore account, which is not available for RMB), NRAs (which is literally an abbreviation for “non-resident account”) and FTAs (free trade account).

Non-resident accounts 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 non-resident accounts can help provide a linkage to onshore and offshore entities and related resources. NRAs and FTAs are available in RMB and foreign currencies.

In addition to non-resident accounts, 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 their trading partners while still providing the features and benefits of a U.S.-based account that’s integrated with PINACLE® PNC’s top-rated corporate online and mobile banking portal. 

4. Documentation Requirement for Cross-Border Transactions

In the United States, cross-border transactions can be initiated without submitting supporting documents to the bank. However, 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. This is because regulatory requirements for cross-border transactions involving China are not fully open and therefore, require verification by the banks.

The required documentation may differ depending on the nature/type, amount of the transaction, regulatory rules, local regulator’s interpretation and implementation of the rules, the bank’s own requirement, and more.

Domestic payments within China (i.e., China-to-China) typically do not require supporting documentation.

5. Local Payment Instruments and Payment Practices

While many payment practices are similar to those in the U.S. market, companies operating in China should be familiar with some of the local payment practices, such as the use of CNAPS (China National Advanced Payment System) and paper-based instruments including credit vouchers and bank commercial drafts.

Bank commercial drafts do not have a direct U.S. equivalent. Commercial drafts are often used for business-to-business payments and have a supply chain finance feature: Invoices are considered paid when commercial drafts are received by the payee. However, funds do not settle until the payment date on the draft, which can be up to 6 months for paper-based acceptance drafts and 12 months for electronic bank drafts. Even though the maturity date can be quite long, commercial drafts may also be discounted prior to maturity.

Commercial drafts are a popular payment instrument in China and often may be the payment vehicle of choice for certain clients. It’s important to understand these drafts, as well as other payment channels, and how they could impact a company’s sales strategy and cash conversion cycle. 

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 of the issuing bank — but not a guarantee of payment — to pay the beneficiary upon compliance with the terms of the LC. The LC helps to mitigate buyer payment risk while also increasing sales potential. Two common types of letters of credit are “standby LCs” (passive payment instrument) and “commercial LCs” (active payment instrument). 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. 

Because a letter of credit represents the obligation of only the issuing bank, confirmation by PNC is an option when the issuing bank is not well known, the buyer feels more comfortable with a local U.S. bank that they are more familiar with, or when the bank’s country presents political or economic risk. (See PNC article “Letter of Credit: Is Yours Confirmed? Why Confirmation is Important in Today’s Market.”)

Documentary Collections — Unlike letters of credit, which are a commitment of the issuing bank, documentary collections represent customer payment risk. While it is recommended to use caution with documentary collections, they can offer effective payment protection for the seller when structured properly. They are less secure than letters of credit but more secure than transacting via open account. The most common payment options under documentary collections are documents against payment (D/P) and documents against acceptance (D/A).

For more information regarding payment mechanisms for international trade, please reach out to your PNC Relationship Manager or International Advisor. 

7. Borrowing Practices in China  

In China, it can be difficult to obtain a line of credit for financing from the banks, even though the banks provide a wide range of financing products. The bank may require the collateral to cover their finance to the borrower; depending on the borrower’s credit rating at the bank, the collateral may be 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. PNC can issue financial standby letters of credit to back local financing in China. Unlike the U.S. market, the banks in China are not as willing to accept equipment and inventory as collateral. Although accounts receivable (AR) can be used for financing, there are many restrictions when the banks provide financing against AR. 

Even if the borrower can provide sufficient collateral required by the bank, the bank may reject the finance application if they deem the borrower’s operation performance to be less than acceptable. This is because from the banks point of view, the primary repayment resource is always the borrower’s cash flow generated from the operation.

8. Onshore and Offshore RMB Markets  

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), while offshore RMB refers to all markets outside of mainland China, the most active of which is Hong Kong. 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 the RMB in a managed environment, where current account transactions are relatively open and capital transactions are more scrutinized. 

The offshore RMB (CNH) market has a free-floating foreign exchange rate and its own interest rates market and could therefore have differing rates than the onshore market. Foreign exchange and cross-border payments in RMB can be conducted freely without restriction. 

PNC’s RMB multicurrency account would be considered in the offshore environment, where clients’ RMB can be freely traded and transacted without restriction. 

In China, it can be difficult to obtain a line of credit for financing from the banks, even though the banks provide a wide range of financing products. The bank may require the collateral to cover their finance to the borrower; depending on the borrower’s credit rating at the bank, the collateral may be a certain percentage of the financing amount.

9. Development of Fintech and Central Bank Digital Currency  

Fintech development has been prolific in China. China is one of the leading countries in terms of the wide coverage and volume of electronic payments, especially mobile payments. For example, the WeChat Wallet and Alipay, developed by internet giants Tencent and Alibaba respectively, have helped China’s consumers to become increasingly cashless. 

For foreign companies based in China with sales to consumers, in addition to leveraging traditional banking channels for sales, companies now also need to have strategies to leverage these fintech payment channels to help reach their customers.

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 that has taken the lead in its development of a digital fiat currency, e-CNY. This digital version of fiat currency is issued by the central bank, the PBOC, and run by authorized operators. Currently, e-CNY has been increasingly used in retail business, and the PBOC is expected to explore the applicability of e-CNY in more use cases, including wholesale and cross border. 

10. Changes in Banking Regulations

Chinese regulators are continually evolving their management of the banking sector, thus the banking regulations in China may frequently change too. As a result, companies may find that their banks change the requirement of their business due to changes in regulations. 

Companies should stay abreast of the banking regulatory changes in China and remain nimble in the event regulatory changes impact the services banks can offer.

Fintech development has been prolific in China. China is one of the leading countries in terms of the wide coverage and volume of electronic payments, especially mobile payments.

Ready to Help

China’s financial environment has experienced significant changes over the last few years, and we expect the trend to continue. PNC’s Shanghai Representative Office can provide overall guidance and help you understand the implications of conducting business in China.

For more information, please contact your PNC Relationship Manager or International Advisor, or visit pnc.com/GoChina.