When an in-house bank is not an option: implementing netting in China

While a lot of our clients have been successfully implementing our payment factory solution in China to simplify payment processing in the country, whenever we go further and we need to implement an in-house bank, implementing it in China is not an option. The alternative to achieve similar benefits as with an in-house bank is to implement a netting solution. As a result of China’s economic growth and the importance it pays in global trade and supply chain, corporate treasurers are looking for ways to improve how they are handling payments in China following local regulations issued by the People’s Bank of China and the State Administration of Foreign Exchange.

The new regulations have allowed treasurers to implement netting solutions in the country. In a recent article, we have gone through netting and why it’s been popular over the past decades among treasurers. While the in-house bank is taking over the role of netting, it’s not yet a possible option in countries such as China, meaning, you must instead design a netting solution for your organization per the local regulations. We’ll look at what you need to consider to implement it successfully.

Why would you implement netting in China?

Implementing netting in China would involve setting up a netting arrangement for financial transactions. Netting is a process of consolidating multiple obligations or transactions between parties into a single net amount, simplifying settlement and reducing the overall number of transactions.

When you are opting for an implementation of a netting solution in China, you need to consider the following:

1. Legal and Regulatory Considerations

Before implementing netting, start with understanding China's complex legal and regulatory framework. Usually, you would need to involve consultancies whose legal and tax experts are well-versed in Chinese financial laws and regulations to ensure that your netting arrangement complies with the local requirements.

2. Define Netting Agreements

Once you clearly understand how netting could work for you in China, it’s time to establish netting agreements between the parties involved. These agreements should outline the terms and conditions of the netting arrangement, including the types of transactions to be netted, the frequency of netting, the calculation method, and dispute resolution mechanisms.

3. Engage with Authorities

Almost always, when implementing a new solution in China – especially when it's related to the financial industry, you will have to engage with authorities. Depending on the nature of the transactions and the parties involved, you might need to engage with regulatory authorities such as the People's Bank of China (PBOC) or the China Banking and Insurance Regulatory Commission (CBIRC). Seek any necessary approvals or permissions before proceeding. At the beginning of your netting journey in China, the consultancy you are working with will advise you on the best practices and requirements when you need to engage with different authorities. Having locals on the team can help navigate the red tape in China.

4. Technology Infrastructure

A netting solution is challenging to implement without the support of a solution provider. Make sure that you find the right partner for the implementation, preferably someone with experience in implementing netting solutions in China, as they will be able to navigate the project better. The solution must accurately calculate and consolidate the net amounts for various transactions.

5. Data Accuracy

To net correctly, the data used for netting calculations must be accurate. There are solutions on the market that ensure that the data is in the right place at the right time and can also help with the data validation and reconciliation processes to minimize errors.

Some of our clients often point out that before the project, they wouldn’t have thought how important it is to ensure that they have the correct master data, and it takes more time to prepare it than one would think. So, before implementing the netting solution, carefully consider where the data comes from and whether you have the proper data integrity for the project.

6. Counterparty Risk Assessment

To lower your risk, evaluate the creditworthiness and financial stability of counterparties involved in the netting arrangement. This is essential to mitigate potential risks associated with netting.

7. Internal Policies and Procedures

As part of your treasury policy, you should remember to develop internal policies and procedures for netting in China. This includes guidelines for initiating, processing, and settling netted transactions and handling exceptional cases and disputes. Having clear guidelines helps current and future employees operate according to the process and rules without exception.

8. Testing and Simulation

Before fully implementing netting in live transactions, conduct thorough testing and simulation to identify any issues or gaps in the netting process. This helps ensure a smooth transition to the new arrangement. It’s a good practice, according to our clients that implemented similar solutions, that you have accurate data in place before the testing.

9. Employee Training

While policies and guidelines are essential, employee training is invaluable. Already during the implementation project, you should schedule time for employee training. For a positive mindset, please communicate with your employees early on: they should be aware of the project implementation, the different phases of it, and how it is going. Change is often associated with fear, so the earlier you start communicating the upcoming changes, the easier it will become to have all your employees on board. Train your staff on the netting process, including how to use the solution, and educate them on the compliance requirements and the overall workflow.

10. Monitoring and Review

The netting process should be monitored and reviewed periodically, so set up a process and assign a responsible person for the task. Regularly assess the effectiveness of netting in reducing transaction volumes and streamlining settlement processes.

11. Legal Documentation

Ensure that all relevant legal documentation is in place, including netting agreements, contracts, and any required disclosures to stakeholders. You should always properly archive all legal documentation so if authorities or partners need it for some reason, it’s at your disposal.

Seek advice from experts in China to implement your netting solution

Remember, the implementation of netting can be complex, and its suitability depends on the specific context and requirements of the parties involved. It's advisable to consult with legal, financial, and regulatory experts who are knowledgeable about the Chinese financial landscape to ensure a successful implementation.