Question (Q): The treasury manager’s role has clearly evolved and grown in scope. What have been the main changes to the treasury role in China?
Findings from the recently-released ‘Treasury Today Corporate Treasury Benchmarking Survey’ revealed that over 50% of corporate treasurers in Asia indicated China as the most important emerging location for regional treasury centres (RTCs). It’s not surprising that treasury managers are therefore playing an increasingly important role in the growth of both local and foreign-owned multinationals (MNCs) in China.
Fundamentally, the functions of a corporate treasury have evolved drastically over the past years, from a unit primarily responsible for liquidity and cash management to today’s treasury managers who have graduated to owning strategic functions such as risk and working capital management.
For those working in foreign-owned entities, their roles also entail helping the company navigate the complex and evolving regulatory landscape in China. This means that everything from overseeing the way in which a subsidiary is set up to the way a company finances its business and trading activities needs to be carefully considered from a treasury perspective.
Treasury managers are also key decision makers in Chinese-headquartered companies, especially for those entities eyeing expansion of their operations beyond China. A key area of interest for them is learning how different global treasury models work and identifying the solutions that best drive multilateral growth.
As Chinese operations continue to move up the value chain, both local and foreign-owned MNCs are no longer using China only as a production base, and multiple factors are driving this evolution. For example, as the world’s most populous nation with a fast-growing middle class, China has come to represent a huge consumer market with strong purchasing power. In addition, higher production costs in China and interest in diversifying supply bases have led to a number of MNCs shifting some of their production to lower-cost countries such as Cambodia and Vietnam, while the China office assumes the function of a supply chain management hub.
Q: What do treasurers identify as their priorities in China?
From dialogue with our clients, we see that optimising working capital and risk management will remain top priorities for treasury managers in China as the economy enters into a slower but sustainable rate of growth.
With the rapid internationalisation of the renminbi (RMB), navigating regulatory changes is also critical. Supply chain financing is likely to move up in the corporate agenda as companies grapple with the need to safeguard the health and liquidity of their key trading partners, as well as efficiently manage their own working capital needs. Managing bank relationships is also important, as treasury managers place a greater emphasis on optimising reserves and credit lines to help them weather challenging times.
Q: What would you identify as the key challenges that are keeping treasury managers in China on their toes?
Unlocking trapped cash, improving cash management inefficiencies and gaining visibility and control over working capital are the most common challenges faced by treasury managers in China. This is especially acute in MNCs operating on multiple enterprise resource planning (ERP) systems, and following varied accounts payable (A/P) and accounts receivable (A/R) processes across their entities in China.
Treasury managers are seeing a greater need to safeguard and support their own supply chains with supply chain financing programmes to ensure that they can continue to meet orders amidst a challenging global operating environment.
External factors such as negotiating currency and capital controls, understanding the latest regulatory changes, securing business funding and managing sovereign, credit and counterparty risk are also key challenges for treasury managers in China.
Q: What would you advocate as best practice in answer to these challenges?
While it might seem obvious the best practice in unlocking trapped cash is to avoid the build-up of trapped cash in the first place. This can be achieved by optimising capital structures to maximise the debt/equity ratio so that cash can be used to pay down debt. Recent regulatory changes that allow the denomination of shareholder loans in RMB rather than foreign currency and a relaxation in the approval process for RMB disbursement will also benefit companies considerably by expanding options and improving efficiency.
In situations where cash has built up and the paying down of debt is no longer an option, the creation of an efficient cash pooling structure can allow MNCs to balance entities with surplus cash with the ones requiring cash. The use of cross-border entrustment loans is increasingly popular as a means of repatriating funds to the corporate headquarters if it is located outside China.
Where none of these options are applicable or desirable, MNCs can try to maximise yield on their local cash balances by employing a number of methods, including investing in RMB money market funds (MMFs). This is particularly relevant given the recent reduction in benchmark interest rates on RMB deposits.
Another best practice that is gaining traction in the region and in China is the centralisation of payments through shared service centres (SSCs), which can create cost efficiencies and greatly improve visibility and control. The centralisation process enables an MNC to achieve standardisation and automation of processes across its entities and leverage, with the right provider, state-of-the-art electronic banking (e-banking) platforms provided by its banking partner.
In the US, supply chain financing is widely accepted as a solution for improving key performance metrics such as day sales outstanding (DSO) and day payables outstanding (DPO), to improve working capital efficiency. This concept is beginning to make inroads into China as more companies set up their regional treasury and supply chain management bases here.
By providing suppliers with a means of accessing liquidity through their partner banks based on the strength of their own credit standing, MNCs and other large buyers are supporting their suppliers and ensuring they can continue to deliver even amid adverse economic conditions. Ultimately, this supplier financing solution will enable a buyer to improve its DPO by standardising or improving payment terms, while providing suppliers with a stable, cost effective financing option.
Others are institutionalising supply chain finance into wider working capital strategies, which allows them to monetise receivables from well-rated counterparties on an on-going basis.
Q: What advice would you offer to treasury managers for addressing currency and capital controls and other regulatory risks, or managing sovereign, credit and counterparty risks?
In terms of risk management, the best practice here is to adopt a proactive approach and pay greater attention to the creditworthiness of key business and banking partners.
Bank acceptance drafts (BADs) are commonly used in China as a payment and settlement tool. However, it is best for more efficient risk management to avoid building up large BAD volumes. Treasury managers should also constantly review the effectiveness of their company’s hedging strategy and ensure that it remains relevant under the current market conditions.
In terms of regulation, international banks play an important role in helping MNCs understand and interpret the impact evolving regulations have on their business. It is essential to set up an ongoing dialogue with your banking partner to keep abreast of latest developments so that adjustments can be made in a timely manner.
Q: What developments can treasury managers in China anticipate over the next few years?
RMB internationalisation is one major development that treasury managers in China should keep on their radar. Since the launch of the RMB cross-border trade settlement programme in 2009, the People’s Bank of China (PBoC) continues to issue new policies in areas such as account opening, trade and foreign direct investment. This offers corporates greater flexibility for conducting international business in the emerging currency.
One recent announcement to note is the expansion of the RMB trade settlement programme, which allows all mainland companies with an import/export licence to invoice or pay in RMB. This not only provides strong impetus for importers/exporters to transact in RMB, but also removes foreign exchange (FX) risk from the onshore Chinese entity, which improves control and liquidity management for corporates with intercompany flows.
Treasury managers should leverage their bank’s local expertise and, more importantly, look to leverage strong global platforms to optimise their financial operations and prepare the business for growth in challenging but ultimately rewarding markets such as China.
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