THE barrier between offshore and onshore money flows has been further lifted by the new Shanghai-Hong Kong Stock Connect program and by further financial deregulation in Shanghai’s pilot Free Trade Zone.

The number of countries using the yuan for more than 10 percent of their payments to China and Hong Kong exceeded 50 for the first time in October, global settlement agency SWIFT said, indicating increasing popularity among international traders.

Since 2009, China has rolled out a series of reforms, including cross-border, quota-based investment programs for “qualified” foreign and domestic institutional investors.

The Shanghai-Hong Kong Stock Connect, launched in October, allows offshore and domestic institutions and individuals to directly trade stocks across the border for the first time.

Meanwhile, restrictions in the Shanghai Free Trade Zone have been eased, allowing companies to borrow money from offshore and manage cross-border money flows.

Shanghai Daily sat down with Sridhar Kanthadai, managing director and regional head of transaction banking for Standard Chartered Bank in China and Northeast Asia, to discuss the new money channels and what they mean for companies and individuals. The discussion also included observations about the three pre-existing programs: Qualified Foreign Institutional Investors (QFII), Renminbi Qualified Foreign Institutional Investors (RQFII) and Qualified Domestic Institutional Investors (QDII).

Kanthadai’s unit mainly supports corporate cash management, trade finance and securities services.

Q: How would you rate the performance of the Shanghai-Hong Kong stock exchange link?

A: It’s early days. We offer a full range of services for retail and institutional clients in Hong Kong, including brokerage services, clearing, custody, and foreign exchange.

In Hong Kong, we have noticed huge interest in Chinese mainland-listed companies, so it is a huge opportunity for northbound investment, which means Hong Kong investors buying into mainland firms. We don’t have a brokerage license for the mainland, so we are not serving the clients here yet.

Over time, the program will be an important channel for international investors to access China and vice versa. It cannot match QFII, RQFII, or QDII overnight, but it is an important step in overall liberalization. The market for Chinese equities is quite strong.

Q: Is the new exchange link encroaching upon the qualified institutional investor programs?

A: We’ve had very strong pipeline for the RQFII program.

I think the approvals for a number of yuan centers and the overall quotas that have been set are very helpful. So you have multiple destinations, including Hong Kong, South Korea, London and Singapore, that all have their own quotas. What we are seeing is very strong client interest in the RQFII quota. There have been a number of applications that have been filed.

As the approval process progresses, we will see a lot more of that quota actually being utilized. We are very bullish about the demand for RQFII. That follows yuan internationalization.

We are sponsoring a number of clients, including those from eastern and southeastern Asia, Europe, and the US, through the application process. It takes time. These are mainly big investment institutions looking to diversify their portfolios. RQFII allows them to invest in equities and bonds, unlike Stock Connect, which only involves equities.

Q: What about the Shanghai pilot Free Trade Zone? Some people have complained that financial liberalization has been too slow. What do you think?

A: The most successful program we’ve seen recently in China is the Shanghai pilot Free Trade Zone, both in scale and support from authorities. We were among the first banks to announce deals in the zone with our client Baoxin Auto Group. As of the end of October, I think we had 15 percent of all cross-border transactions registered in the FTZ. We are certainly one of the leading users of that particular channel.

We see a lot of opportunities despite the restriction of having to register a company in the zone. Many of our clients have been waiting for a pan-China program because they don’t have an entity in the FTZ.

Q: What has been the most useful reform in the Free Trade Zone?

A: One misunderstanding about the FTZ is that it is only a financing tool. While offshore and onshore financing is an essential part, the zone is also about better management of corporate liquidity.

As the use of the yuan grows outside the country, more companies want to manage the currency, both onshore and offshore, in a consistent way. When we can link the liquidity pools of onshore and offshore, the usefulness of having offshore yuan will be greater. When yuan internationalization becomes more pervasive, there will be more yuan offshore. This is a very important liquidity tool for companies.

Another aspect we have not yet seen much but is worth noting is the promotion of operational efficiency for companies. Centralized payments and receipts collection, which is part of the Free Trade Zone, allows companies to become much more operationally effective and efficient.

Today, with margins under threat, companies are looking for efficiencies. They want to invest every dollar or yuan they have in supporting clients and manufacturing processes. Centralizing collection and payments is a very good way to improve efficiency.

Large companies in China usually have various entities. For each company to set up its own payments and collection process for each entity is not only inefficient but also in many cases causes lack of standardization and potential fraud.

Centralizing collections and payments means that one entity can be authorized to collect and pay on behalf of all the others.

Q: What are the benefits of centralized cash management for companies?

A: Different entities have different positions.

If I think about the many companies that are implementing liquidity management, overall unused liquidity left behind in various entities can be reduced by 10 to 20 percent. Depending on the size of the company and its liquidity, the liquidity profile can be dramatically improved. Concerning efficiency, centralized payment and collection offers large companies on a global scale between 5 to 10 percent cost efficiency.

More importantly, potential fraud is reduced. It’s still early days for China-specific programs. As we implement these programs, I’m sure there will be data tracking where efficiencies occur.