Awakening the Dragon: Making the Case for Asia

No one could have imagined the fallout from the financial crisis, which has changed the banking landscape the world over. Many banks and corporates were forced to reassess their strategy and question how to position themselves for the future.

Strategies, structures and processes are evolving, including a shift in focus from traditional home markets to rapidly growing emerging markets, all of which can offer unparalleled opportunities and a new playing field for growth.

The delicate financial stability of this age has left many corporations deeply wary of global banking partnerships. They have been shunned in favour of adopting several regional banking suppliers in order to spread counterparty risk and adopt transparency and best-of-breed regional practices.

Cash management is going global as clients look for new solutions and platforms to help them optimise their money around the world. This includes traditional cash management services, such as liquidity management, cash pooling structures, and payments and receivables.

As mentioned above, corporates are increasingly focussed on local bank relationships. This is particularly true in currency-regulated countries, such as China and India. The way corporates are diversified across regions means that most corporates are choosing to retain several bank relationships.

The Changing Asian Treasury Management Landscape

Long established in the US and Europe, cash management is a mature business. However, post-crisis Asia is becoming an increasingly important region for corporates looking for long-term growth and new destinations for liquidity, as well as for financial institutions looking for new ways to answer their clients’ global transaction banking needs. In order to fund these aspirations, the concentration of cash is moving from west to east – requiring a new approach to dealing with cash and liquidity management in the region.

Pre-crisis, Asia was fairly relaxed about liquidity, but since the financial fallout, clients are looking for extensive cash management and liquidity capabilities regionally that contribute to their global needs. During the crisis, some corporates were caught out, unable to get an exact location for their cash in real-time or have control over it, as many processes remained local, manual and lacked transparency. This left them badly in need of a more sophisticated and regional cash solution.

The key to success for corporates is the use of one global platform that enables interoperability between the international bank and all local banking providers, allowing cash to be mobilised and all information to be gathered centrally. This snapshot can then be leveraged to verify that their money works for them globally. A centralised structure can provide global liquidity control and then assist treasurers in looking at how cash is invested to optimise yield. The single, global liquidity platform needs to be scalable in order to match the geographical footprint to support the growth of its clients’ business.

The concept of ‘follow the sun’ is not a new one in banking, but is now being looked at more seriously for cash management. In this sense, if a company is cash rich in Asia, to the extent permitted by applicable laws and regulations, then a treasurer can upstream cash and bring it to work effectively in Europe by investing the money centrally.

Local banks can be a vital lifeline in providing on-the-ground services, such as cash handling or credit facilities, for local growth needs, as these local players may have the capacity to lend. However, as we saw during the recent financial crisis, this lifeline is often cut off when the going gets tough. Pre-crisis, when most were cash rich, a global relationship was a useful source of credit; but post-crisis, the lack of money available for lending has meant that corporates need to be able to source a committed facility, often only achievable through a diversification of local banking relationships.

Cash pooling via an entrustment loan structure, for example, is already well established in China. However, cash is still not visible because Asian liquidity management is fragmented across the region. It can be difficult to gain an accurate snapshot of the quantity of cash sitting in China across various local banks. Therefore, in order to maximise opportunities across Asia and improve clients’ liquidity management structures, corporate treasurers need knowledge and experience of the region. They need to understand the way markets work to gain a comparative advantage, not only for a specific Asian strategy but also in the context of a global solution.

Innovating Your Way to Recovery

Innovation is the cornerstone on which a global cash management strategy is built. One of the best ways to ensure a regional network of bank relationships can be brought together effectively is via a shared services centre (SSC). This concept has been popular in Europe and the US for some time, primarily due to its cost reduction benefits, but is now finally taking off in Asia. SSCs offer a cost effective and operationally efficient way of centralising global cash and liquidity management.

There is also a new impetus post-crisis for the adoption of SSCs and this driver is compliance, a combination of heightened risk management and the need for better control. Not only is a SSC transparent, offering a single, standardised and automated view via industry standards, it is also scalable, to ensure it can be optimised in conjunction with a corporate’s expanding geographical footprint.

Global platforms can be easily implemented with the introduction of new generation electronic banking services, which can be customised to enable client users to extract the exact information they need. In a new era where risk management tops the global agenda, this offers unprecedented levels of visibility and control on cashflows. It should also facilitate a standard format so clients can pick and choose which banks they want to work with. In addition, regional nuances should be accommodated, such as Japanese and Chinese characters.

Managing Regional Nuances

Asia is a highly diverse market and one of the huge variations is in interest rates. There is likely to be a hike in interest rates across the region in 2Q and 3Q 2011. Interest rate differentials need to be managed, as do currency fluctuations, which can drive up funding costs due to the cost of borrowing. The key is to offset this cost of borrowing against more expensive currencies. In some countries where internationalisation has not happened, the American dollar is the ubiquitous currency that has to be converted, leaving companies exposed to currency depreciation. However, some markets are beginning to be liberalised, and this is leading to new cash management opportunities, around currency appreciation, for example.

Liberalisation of markets and technology is making ‘against the sun’ possible where funds – in certain legal and regulatory circumstances – can be moved from Europe and the US to Asia, allowing for vital injections of cash to go into fuelling strategic developments and growth in Asia.

Many China-based companies are increasingly looking to raise further capital through Hong Kong, which is helping to fuel a growing pool of liquidity waiting to be leveraged in this financial hub, as well as fuelling the appreciation of the renminbi (RMB). Although regulatory requirements remain unchanged, the region is evolving as the benefits of foreign flows of cash are gradually acknowledged, and this trend will unfold over the coming year.

Conclusion

As we move into another decade, 2011 will offer a new era in global cash management. As emerging markets have greater influence on corporates’ long-term growth strategies, the rise to prominence of cash and liquidity management will continue across Asia. Not only will the region increasingly become an integral and integrated part of a corporate’s global cash management, but we will also see the internationalisation of many of Asia’s currencies, which will open up further opportunities.

Maximising working capital is, as ever, the top priority for firms. We will therefore continue to see the ongoing movement of cash from west to east, necessitating a new approach to tackling cash and liquidity management across the Asia region.

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