Treasury Management with Chinese Characteristics

In the early 2000s a large part of a Chinese treasury manager’s responsibilities centred on the provision of checks and controls around finance processes. Over the past five years, the role has evolved beyond this to encompass aspects of working capital management (WCM).

China is a unique market with its own characteristics. Many of the challenges facing treasury managers in multinational corporates (MNCs), both domestic and foreign-owned, are similar. Hence, best practices for treasury managers, whether in domestic or foreign-owned MNCs, to overcome these challenges are fairly similar.

Changes in the Regulatory Environment

The general direction of recent regulatory changes in China has been towards further simplification and relaxation of regulations. Besides changes to regulations addressing entrustment loans, other examples of this regulatory loosening can be found in new rules covering foreign exchange (FX) transactions.

Effective as of 1 August 2012, the State Administration of Foreign Exchange (SAFE) has simplified the regulations around the use of FX for trade in goods. Key changes include:

  • Simplification of documentation and procedures related to FX involving trade in goods.
  • Looser requirements when classifying enterprises into A, B or C categories, particularly for A-rated enterprises which would cover the bulk of all enterprises in China.

As a result of the changes, A-rated enterprises will no longer be required to provide supporting documents for incoming funds related to the sales of goods or services; while for outgoing funds, instead of requiring a full set of supporting documents, submission of any one of these supporting documents will be sufficient under the new regulations.

Given the dynamic changes in China’s regulatory environment, it is important for treasury managers to closely monitor the on-going changes in regulations, as well as work with a reliable banking partner that is closely attuned to these regulatory changes, and able to provide quick advice and strong on-the-ground support.

Impact of Growth into the Hinterlands

In the early stages of development, increases in wealth were primarily centred in coastal regions, such as the Yangtze River Delta and the Pearl River Delta. With wealth increasingly flowing into other regions in China, this has resulted in increased demand for foreign goods and services in the hinterlands, as well as the expansion of foreign-owned MNCs’ operations. This, in turn, poses its own unique set of challenges.

With more MNCs going after the same finite pool of treasury professionals to facilitate expansion, it is becoming increasingly difficult for treasury managers to hire the requisite resources to continue growing. This has led treasury managers to look beyond their own resources to ensure that they are in a position to support business expansion.

Increasingly, this involves the following:

  • Outsourcing.
  • Streamlining processes.
  • Automation.

This also means working with business partners, including banks, to centralise and streamline accounts payable (A/P), accounts receivable (A/R) and reconciliation processes, while at the same time ensuring that the requisite checks and controls are still maintained. Some examples of best practice solutions that are being used by MNCs in this space include solutions such as virtual accounts and SWIFT for Corporates.

Virtual accounts
Virtual accounts involve the provision of a unique pay-to account number for each buyer. This aids a corporate in its receivables management as it facilitates ease of identification of incoming funds.

The benefits include:

  • Efficiency improvements through the streamlining of reconciliation processes.
  • Better WCM.

SWIFT for Corporates
With SWIFT for Corporates, corporations can interface with banks via a single SWIFT-based interface instead of through multiple channels and proprietary bank formats.

The benefits include:

  • Treasury manpower savings through more efficient account monitoring, reconciliations, A/P and A/R processes.
  • Maintenance savings from reducing the number of proprietary bank formats.

These are in addition to the working capital optimisation benefits from such solutions.

Tightening of Credit in China

The earlier economic crisis in 2008/2009 has had a smaller impact on China compared to other parts of the world. However, with the current euro debt crisis showing no signs of abating, banks in China are increasingly tightening credit lines to businesses in China. This is particularly so where lending to small and medium-sized enterprises (SMEs) is concerned.

There is growing recognition by treasury managers that this poses an indirect threat to their supply chains which are typically underpinned by SMEs.

There is increasing recognition by treasury managers that this situation can be better managed by turning to solutions such as supply chain financing (SCF). Such a solution allows anchor banks to have better visibility over the business and operations of suppliers, and hence anchor banks will be more amenable to making loans to these suppliers.

Internationalisation of the RMB

A topic that has been dominating the news recently has been that of the internationalisation of the renminbi (RMB). This has a significant impact on treasury management, from FX management to asset diversification and currency depreciation management. Hence this is an area that treasury managers need to pay close attention to.

Besides the growth of RMB as a trade currency, the other areas of growth in this space have been that of so-called ‘dim sum’ bonds and, more recently, RMB loans in Hong Kong. Dim sum bond issuance in Hong Kong, for example, has risen more than five-fold from US$2.3bn in 2009 to US$14bn in 2011. This, in part, has also been driven by streamlining of the approval process to reinvest such funds in China.

Domestic MNC Case Study

While there are common themes in certain aspects across both foreign-owned and domestic MNCs, the considerations for a foreign-owned MNC in China, as compared with a Chinese MNC, are also different. This in turn drives the priorities along slightly different lines for the different types of entities.

In 2005, none of the top 10 companies within Fortune’s Global 500 were Chinese owned MNCs. In 2012, there are three. This increase in size and reach of domestic MNCs facilitates exchange of best practices, and there is greater awareness of the breadth and depth of the different treasury management solutions that treasury managers are looking for.

The following case study showcases the increased level of sophistication that treasury managers in a domestic MNC are looking for in terms of working capital solutions. It was interesting to note that the case study involves a global provider of high technology equipment with global revenues in excess of US$10bn.

The objectives of a treasury manager in this domestic Chinese MNC were similar to that of a foreign-owned MNC, including:

  • Increase competitiveness by shortening cash collection days.
  • Improve A/R risk management.
  • Enhance cash flow and earnings quality.

In view of these objectives, a full working capital solution encompassing A/R purchase (ARP), cash and liquidity management, supply chain financing and credit risk management was developed to fulfil the treasury needs.

Figure 1: Proposed Working Capital Solution for a Domestic Hi-Tech MNC


Source: DBS Bank

Such solutions are at the current cutting edge of treasury management and reflect the growing needs of domestic MNCs. Through such a solution, treasury managers benefit by:

Figure 2: Objective and Benefits of a Working Capital Solution for a Domestic Hi-Tech MNC


Source: DBS Bank

Foreign-owned MNC

While certain challenges faced by foreign-owned MNCs are similar to those faced by domestic MNCs, and hence the best practices required to overcome these are similar, the requirements of foreign-owned MNCs somewhat differ due to their operating needs.

Growing affluence has meant that the Chinese economy is moving away from being manufacturing-based to one where domestic consumption is playing a bigger role. With this transition, foreign-owned MNCs are no longer using China primarily as a manufacturing base, but are increasingly seeing China as a key market for their products and services. With profits being generated in China, one of the more common challenges that foreign-owned MNCs encounter is the issue of trapped liquidity arising due to:

  • Regulations in China.
  • The need for foreign-owned MNCs to repatriate profits out of the country.

To overcome these constraints, most foreign-owned MNCs in China use liquidity management structures involving the use of entrustment loan structures, with a bank standing between lenders and borrowers. The bank also helps facilitate the movement of funds between entities with surplus cash to those requiring cash.

Under earlier legislation enacted in 2004, entrustment loans were feasible for both Chinese and subsidiaries of foreign-owned companies on a one-off basis. Multilateral cash pooling structures could only be established by MNCs with a holding company or qualified regional/global headquarters in China.

With a traditional bilateral RMB entrustment loan structure, a bank acts as an intermediary between the lending/borrowing parties in order to meet regulatory restrictions on intercompany lending. Entities with surplus funds place cash on deposit with the bank, and request that the bank lends the funds to a designated company and specifies the terms of the loan.

New regulations enacted in 2009 increased the availability of multilateral entrustment loan cash pooling structures.
With a multilateral arrangement, traditional bilateral entrustment loan structures can be expanded to multiple entities, with multiple entrusted loans covered under a single legal agreement, reducing administrative overheads.

The Future of Treasury Management in China

With China already being a key manufacturing centre and increasingly also becoming a key market for products and services, there are beginning to be signs of foreign-owned MNCs shifting their regional offices from places such as Hong Kong or Singapore into China. With this shift, treasury managers in China will be at the forefront of defining and leading the rest of the region, and indeed the world, in the development of best practices in treasury management.


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