Asia Pacific has historically attracted a reputation as a complex region for treasury management; in that its tax and regulatory environment has often made it challenging for corporations to establish structures that allow them to optimise their cash. Indeed, in a number of countries within the region cash has either been trapped or is inaccessible to the rest of the corporate’s global enterprise.
However, the perception of Asia Pacific as a homogenous region of trapped cash is an inaccurate generalisation. In reality, the region has always encompassed a wide variety of regulatory approaches. These range from highly regulated countries – most obviously China and India – to moderately regulated countries such as Indonesia and Thailand, through to liberalised territories and countries such as Hong Kong and Singapore. To understand how regulatory reform affects treasury management, it is helpful to consider three key themes that help to define the approach taken by regulators.
The first is the mobility of cash, both domestically or across borders, and the transferability of capital as well as intercompany-related cash. The second is a local currency’s convertibility into foreign currency such as US dollars (USD); some countries, for example, operate exchange controls and require trade documents before permitting conversion. The third is how the regulators treat co-mingling of cash between resident and non-resident entities, and the methods of liquidity management through physical or notional pooling that are permitted.
It remains helpful to distinguish between the regulatory regimes of different countries in Asia Pacific. However, over the past decade there has been a steady blurring of the boundaries between highly-regulated and lightly-regulated markets. This trend has accelerated sharply in the post-financial crisis environment since 2008. Asia Pacific has successfully weathered difficult global conditions because of the intrinsic strength of its economies, and the lessons it learned from the Asian financial crisis of 19971. This is most notable in the huge growth in foreign currency reserves by many Asian economies since then: China’s reserves alone have increased by more than 2,200% since 1997. As a result, governments and central banks have become more confident about regulatory reform and more pro-business in their outlook.
China is Changing
While regulatory reform that affects treasury management is evolving across Asia Pacific, change has been most dramatic in China – the region’s largest and most important economy. The period since 2009 has seen a broadening of the use of the renminbi (RMB) for both onshore and offshore settlement. More recently, with permission from the State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBOC), selected companies have been allowed to structure foreign currency and renminbi cross-border sweep structures and what was impossible just a few months ago is now a reality for some.
The ability to pool foreign currency will enable overseas lending and borrowing. It will also facilitate foreign exchange (FX) hedging and inter-company borrowing and lending, and therefore allow free funds transfer with overseas accounts. By integrating China into regional and global treasury and liquidity structures, cross-border foreign currency and RMB cash concentration will dramatically improve treasury efficiency in the country.
It is important to note that cross-border foreign currency lending and borrowing are subject to existing foreign debt quotas, so must be closely monitored. Quota management is executed by establishing a new foreign currency international header account in a cross-border foreign currency sweep structure. All foreign currency movements are limited to SAFE-approved quotas between the international header account and the domestic foreign currency header account.
The quotas applied are the gross foreign debt quota (FDQ), the overseas lending quota (OLQ) of the group and the 90-day free-funds movement quota. The FDQ is an upper limit for aggregated cross-border borrowing by the onshore entity, while the OLQ is the upper limit for aggregated cross-border lending by the onshore entity. The 90-day free movement quota is a specific limit for cross-border USD sweeping.
If these quotas (see boxout at end of article) are breached, the settlement bank that is enabling sweeping is obliged to halt the sweeping activity. Consequently, companies must be confident that their bank is vigilant in monitoring sweeps so that they remain within the quota (See Figure 1 below for the structure of a domestic and cross-border foreign currency pooling structure).
Figure 1: Domestic USD and X-Border USD Structure.
Source: BoA Merrill.
China has also permitted cross-border RMB sweeping on a trial, or case-by-case basis as part of its drive to internationalise the currency. This new pilot allows overseas lending in RMB enabling companies, for example, to use the currency for investment or trade in another part of their business, and reduce risk caused by a currency mismatch. The pilot project is currently active only in Shanghai, with companies based in the city able to submit applications through their settlement banks.
In order to qualify, the lender must have free RMB funds generated from operating income, and the overseas borrower must be the lender’s parent or affiliated/related companies. The overseas borrower must have a real need for RMB funds, such as settling RMB-denominated invoices. As with foreign currency pooling, cross-border RMB pooling is subject to quota management, which is determined by the gross overseas lending quota of the group (See Figure 2 below for the structure of a domestic and cross-border RMB pooling).
Figure 2: Domestic CNY and X-border CNY Structure.
Source: BoA Merrill.
Conclusion: The Importance of Foresight
The changes in China in recent months have been more dramatic than those in other Asia Pacific countries, but only serve to highlight the direction that regulation is taking in the region. Asia Pacific remains a vast and diverse continent, but it is clear that the gulf between the most lightly-regulated and the most heavily-regulated countries is narrowing. It is equally clear that the path of regulatory liberalisation will not be linear and will necessarily involve considerable complexities and shifts in policy.
For companies doing business in Asia, it is essential to keep a close eye on events in Asia Pacific. Corporations need to be confident that their bank maintains strong relationships with regulators and understands how and why policy is changing. Banks also need to be able to respond rapidly to changes with appropriate advice and insight on how clients can navigate the changing regulatory environment.
Equally important is that banks should have the expertise and technology in place to take advantage of change and mobilise cash rapidly. They need to have the foresight to build capabilities in advance so that they can move quickly when change does come. Equally, they must be able to modularise and to scale-up existing structures, such as notional pools in Europe or Asia, to incorporate cash from countries where it was formerly trapped so it can be used effectively. In short, corporations need to be certain that their trusted bank advisor in Asia Pacific is ready to help them harness the opportunities as they unfold for improving treasury management.
1 State Administration of Foreign Exchange, People’s Republic of China and the People’s Bank of China, Foreign reserves minus gold, 1997, $142.8 billion, December 2012, $3,310 billion.
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