Building a Strategic Treasury Function in China

Developing a dynamic and flexible treasury function and planning ahead are important factors in an environment such as China’s, where ever-changing market conditions and constantly shifting regulations are prevalent. The increasing trend to establish China-based headquarters will require western companies to consider the need to invest in transforming their treasury function in that country from a traditional role of transaction processing and reacting to ad hoc needs, to one that’s strategic: flexible, automated, standardised, well planned and business focused.

Many companies see the transformation of their China treasury function as central to their regional growth plans, enabling them to foster closer connections to their Asian business operations and demonstrate added commitment to the local economy. While there are still myths in the market that ‘it’s China (or it’s Asia) so it’s different and/or it cannot be done’, significant advancements over the past five years have enabled companies to successfully transform the role of their local treasury operations.

Most notably, the growing number of shared service centres (SSCs) in China and Asia – including locations such as Singapore, Hong Kong and more recently, Malaysia – has allowed much of a treasury’s transaction processing function to be captured through these SSCs. Input from the company’s global treasury function has also been an important factor in helping to determine how best to support a business in its new growth paradigm. This article provides insights that may be helpful in building a strong treasury and cash management foundation in China to support your regional and broader global operations.

Working with the RMB

As China continues to experiment with loosening regulatory restrictions related to the renminbi (RMB), companies are able to do more with the currency to support their business growth, manage costs, and drive efficiencies and effectiveness. This is evident in the number of cross-border trade related transactions being settled in RMB rather than US dollars (USD). 

This on-going change has caused companies to re-evaluate the role that the currency plays in its business, not just within China but also globally. Using the RMB can release a range of potential benefits, including:

  • Improving top-line revenue with customers that prefer the RMB.
  • Improving the cost structure of deals with suppliers that prefer the RMB (but have historically priced in USD with a 5%-25% ‘cushion’ to compensate for expected depreciation).
  • Altering the company’s foreign currency risk profile to better manage risk through global treasury centres.
  • Supporting and aligning with the agenda of the State Administration of Foreign Exchange (SAFE).
  • Reducing complexity in foreign exchange (FX) processes.
  • Reducing the number of currencies to better manage in-country liquidity.

Winning Within the Banking and Regulatory Landscape

While there has been much progress, China’s banking and regulatory landscape is still in its development stage and leading companies are using the best that the international and domestic banks have to offer, while also having a targeted regulator relations programme.

The electronic banking (e-banking) system, relatively low international bank penetration, complex manual regulatory requirements and legacy practices typically means that most companies have to use many banks in China. However many look to streamline the number of bank partners to two to three banks for the whole country, which is a difficult task to accomplish 

Domestic banks have a much larger branch presence in China, greater access to capital via their deposit base, and the ability to effectively work with SAFE, however, the state agency that sets FX policies along with its other functions.  However, these domestic banks are still developing their services and extending technology, customer support and relationship management models. This, coupled with the fact that a domestic bank’s branches are not closely tied together – much as though you are dealing with a completely different bank – creates a challenge for companies used to working with more integrated international banks. 

Local Chinese banks are eager to grow internationally and are keen to lend to multinationals, which the latter are often using to their advantage. As PricewaterhouseCooper’s (PwC) June 2012 survey, entitled ‘Foreign Banks in China’, notes international banks still have a share of below 5% of the Chinese market, yet they are typically much better known in China than local banks for their products, technological sophistication, relationship management, transparency and global expertise, and can therefore better enable standardisation and efficiencies within the country and across borders.

It’s also crucial for businesses to cultivate a good relationship with the local regulators, and in the Chinese context particularly with SAFE. The government appears inclined to experiment with new liberalisation policies, and working closely with SAFE may provide a better perspective about the regulator’s expectations.

Managing Cash and Liquidity

Corporates entering China typically have significant growth plans, new plants, new acquisitions and joint ventures in mind, plus they want a broader country footprint, and face evolving business, regulatory, political and social environment and cultural norms. All this makes for a difficult task for treasuries trying to forecast and optimise cash and liquidity.

China’s heavily-regulated environment typically means more time is needed to react and, coupled with its market dynamics and the limited financing tools available, short-, medium- and long-term cash forecasting becomes critical. The objective is not so much to predict cash flow with a high degree of accuracy, although that would be helpful, but to understand the range of potential scenarios so that management can make more informed decisions and alternative investment and financing plans, and have better flexibility to respond, for example, to minimise trapped cash build up. 

The number and type of bank accounts, collection and disbursement techniques are all levers used by leading companies. Having more accounts and relationships raises complexity and cost, and reduces a company’s level of visibility, transparency and control. Bank account structures are often unnecessarily complicated at many multinational corporations and typically the result of different regulatory environments and market conditions. Realistically, companies can be effective with a few disbursement accounts and, depending on the industry, a number of collection accounts. The ‘wild card’ is the number of accounts for tax payments and the special accounts for loans and other capital type accounts. Also, the more business one can do in RMB, the more streamlined the account structure and number of banking partners can be. 

Bank acceptance drafts (essentially post-dated cheques) are also common practice in certain industries, and their use increases or decreases with the state of the economy and the availability of bank funding. Leading companies manage them effectively with a clear policy, given the associated working capital, finance and risk dimensions. Finally, the high growth of credit and debit cards is changing the payment landscape rather quickly and is being leveraged by forward-looking companies.

Similar to other countries, a cash pool-type structure is a key tool available in China. Generally, pooling is allowed only when operating within the same legal entity. Since the People’s Bank of China’s (PBOC) general rules for lending prohibits intercompany lending between non-financial institutions, entrustment loans can be used to work within such rules. Effectively, RMB or foreign currency pools can be set up through an entrustment loan framework, which allow funds to move from one company to the other, with a bank acting as an agent for which they charge a fee.

These entrustment loans can also be used, at times, on a cross-border basis to funnel your excess liquidity to other parts of the world. While these cross-border loans will eventually need to be repaid, they can help to meet temporary cash needs. However, historically there have been onerous regulatory barriers to obtaining SAFE approval.

Funding Growth

Within China, external financing vehicles for foreign multinationals are still limited and very much dominated by traditional bank loans, set at PBOC rates. The simple procedures for originating such loans is a major driver for their popularity. Various segments of the capital markets, including the sale of commercial paper and long-term bonds, are continuing to grow, but foreign companies are currently restricted from using them as financing vehicles.

These markets are slowly opening up, however, and might see some changes within the next few years. ‘Panda bonds’, or bonds issued by foreign companies within China, and on-shore equity listings, for example, are currently under discussion for multinational companies. Other vehicles such as project financing and leasing do not appear to be popular, mainly because of strict limitations and the lack of clarity on the range of legal and regulatory complexities.

As Beijing pursues the gradual process of internationalising its currency, Hong Kong has become a key platform for issuing RMB and RMB-denominated products. In particular, RMB-denominated bonds in Hong Kong, or ‘dim sum’ bonds, are gaining in popularity and have been used by a number of multinational companies.

Leveraging Finance Companies

Finance companies, as defined by the China Banking Regulatory Commission (CBRC), are relatively new in China and are a type of business licence that can further enable more efficient and effective treasury management.  Finance companies are non-bank financial institutions that provide financial management services, common to a typical centralised treasury, to the group’s member entities. 

These services include FX transactions, entrustment loans, accepting/discounting bills and deposits, settlements and providing guarantees, to name but a few. However, a finance company is strictly regulated by the CBRC and faces stringent compliance and reporting requirements. Only companies with a sufficient amount of scale and financing need consider them worth the extra time and effort.

Alternatively, some companies establish a regional headquarters (RHQ) or a Chinese holding company (CHC), two other vehicles that can benefit treasury. An RHQ can play an active role in centralising the regional treasury by taking advantage of local favourable policies, whereas a CHC can help enhance group cash management, as it can achieve cash concentration via the entrustment loan arrangement. Multinational companies commonly set up a CHC to hold various investments, and can enhance tax efficiency where dividends are distributed.

Managing treasury in China is by no means easy, but thoughtful consideration and evaluation of your company’s situation along with a willingness to change can yield substantial benefits.


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