Treasury Transformation In China

If people were sceptical of China’s importance as an economic powerhouse before the global financial crisis, there are now few, if any, disbelievers. As China continued to demonstrate impressive growth throughout 2008 and 2009, this thriving country is expected to surpass Japan as the world’s second largest economy by the end of 2010. China’s position is an important consideration for nearly every treasury professional, in almost every industry – first and foremost as a supply source and a major consumer market. Companies headquartered in western economies (such as North America, Europe and Australia) are therefore increasing their focus on China, compared with more mature economies with slower growth.

However, as Chinese multinationals seek to expand their geographic footprint, they are becoming increasingly competitive in foreign markets, both organically and through acquisition. Consequently, western competitors need to refine their strategy and enhance their efficiency to compete effectively. Furthermore, as China is proving to be the world’s most buoyant market for mergers and acquisitions (M&As), with considerable incoming and outgoing investment, an increasing number of treasurers in western companies need to manage the cash and financing for China-based subsidiaries, while treasurers of companies headquartered in China have increasingly international cash and risk management requirements.

To understand the transformations occurring in China-based corporations, SunGard commissioned Asymmetric Solutions, a consultancy firm specialising in global treasury management, to help benchmark the treasury processes and systems currently being used in Chinese companies as compared to their western peers. The study evaluated cash, treasury and risk management practices in 10 major Chinese companies.

Treasury Responsibilities: Chinese Versus Global Corporations

In general, the responsibilities of treasuries in China mirror those in other parts of the world, i.e. cash, risk and funding are all core activities. In China treasury frequently manages trade finance, whereas it is more commonly managed in a separate department in western multinationals. A siloed approach to trade finance and cash management is potentially a disadvantage for western companies seeking to optimise working capital and forecast cash flow, as treasurers often lack control or oversight of trade flows, which are often for large amounts.

In payments and accounts receivable (A/R) too, Chinese treasurers often have a significantly larger role, although these areas are typically less centralised (see Figure 1) than their foreign peers. These areas are traditionally the most difficult to centralise and few companies anywhere in the world have achieved complete centralisation, as Figure 2 illustrates. However, companies in China are beginning to look at accounts payable (A/P) and A/R centralisation, either within treasury or as part of a separate financial shared service centre (SSC).

Chinese treasurers who have direct responsibility or oversight of payments and collections have a significant advantage over many foreign companies as they are in a better position to centralise these areas, whereas in other parts of the world, responsibility for payments and collections is often fragmented, making it difficult to implement consistent business processes and technology, and achieve visibility across the business.

Figure 1. Degree of Centralisation – China

Source: SunGard
Figure 2. Degree of Centralisation – Global

Source: SunGard


Treasury Technology

A significant difference between companies in China and their foreign peers is the use of treasury technology, specifically the use of treasury management systems (TMS). While over 90% of large foreign corporates make use of a TMS or an enterprise resource planning (ERP) system for treasury management, only 20% of companies in the China benchmark sample used a TMS. Companies that indicated in the survey that they use an ERP typically do not use it for treasury management, except for sourcing cash flow and exposure information. While 90% of participants indicated that they used systems provided by their banks, 50% still sent payments to their banks manually (see Figure 3).

Figure 3. Treasury Technology

Source: SunGard

The survey findings also revealed that the majority of treasury tasks performed by Chinese companies are conducted manually or using spreadsheets. This is a particular concern in areas such as cashflow forecasting (which 90% of firms conduct manually or using spreadsheets), checking credit limits (100%) and reconciling bank statements (100%). With companies globally seeking to increase control, manage liquidity and monitor risk, the lack of automation and auditability in these and other areas is significant.

However, while many western economies potentially have a competitive advantage today in their use of technology for automation, visibility and control over both cashflow and information, this advantage is likely to be short-lived. Chinese companies lacking the legacy processes and technology of their foreign peers have the opportunity to ‘leapfrog’ their western competitors and quickly leverage best practice technology and processes.

Cash Management Banks

Another outcome of expanding internationally relatively late compared with western firms is that Chinese companies tend to work with fewer cash management banks. For example, 40% of Chinese companies, versus 5% of foreign companies, worked with only one or two cash management banks, while a high proportion (45%) of western companies had over 10 banking relationships (and often significantly more) compared with 20% of firms in China.

In Europe and North America, 75% of companies indicated that they aim to rationalise their banking relationships, although few, if any, large firms are intending to work with a single cash management bank globally. In contrast, an equal proportion – 40% each respectively – of companies in China are looking to reduce or increase their banking relationships. Western companies have often found that working with a large number of banks globally has created a variety of challenges in terms of connectivity, financial messaging, ensuring visibility of balance and cashflow information and maintaining up-to-date mandates. Increasingly, large multinationals are turning to SWIFT as a means of connecting with their banking partners. Larger Chinese companies are also looking to SWIFT as a mechanism for maintaining common standards of connectivity when developing new bank relationships.

Risk Management

Risk management is a less developed discipline among Chinese multinationals than among their foreign peers. For example, they often deal with a smaller number of currencies, so they have a simpler approach to foreign exchange (FX) risk management. Furthermore, hedging is more difficult in China than elsewhere. Counterparty credit risk is also less developed, with little focus on this area currently. As companies develop their treasury technology infrastructure and businesses processes, and expand internationally with new trading partners, this is likely to change rapidly.

RMB Cross-border Trade Settlement

Most cross-border trade in Asia takes place in US dollars. For China, as it becomes the world’s largest exporter and the third largest importer, creating the optimum conditions for exporters and importers has become a major priority. The need to trade in US dollars is still a major hindrance for many Chinese companies and their international trading partners, partially due to restrictions on the convertibility of renminbi (RMB). As such, the RMB cross-border settlement pilot scheme was launched in 2009 as a way of supporting cross-border trade transactions without creating currency risk issues for Chinese companies.

The scheme supports two-way trade in RMB, including both trade instruments (such as letters of credit (LCs)) and open account. A number of international banks have now received settlement and agent bank licences, and are actively conducting cross-border trade and account opening in RMB.

Liquidity Management

Cash and liquidity management is frequently cited as a major challenge by multinational corporates operating in China, primarily due to regulatory constraints on the flow of RMB out of the country, leading to the problem of ‘trapped’ liquidity that cannot easily be repatriated or used to finance the business elsewhere. However, while significant challenges remain, there are important regulatory developments that are making it easier for foreign and Chinese firms alike to conduct international business in China.

With the US dollar still the predominant currency for international trade in China, many companies experience the problem of ‘trapped’ cash, and difficulties in financing businesses in China. Intercompany lending has been a particular issue for foreign companies operating in China. However, in 2009 a new regulation was passed that increases the availability of multilateral foreign currency entrustment loan cash pooling structures. Any company incorporated in China can now manage its foreign currency balances centrally by making use of multilateral entrustment loans and overnight overdraft facilities. Under a multilateral arrangement, the traditional bilateral structure can be expanded to multiple entities, with multiple entrusted loans covered under a single legal agreement, reducing administrative overheads.


Treasury departments of companies headquartered in China are handling a broadening scope of responsibilities. There is a strong focus on best practices, and as these companies develop their activities internationally and invest in new processes and technology, they will increasingly prove highly competitive compared with their western peers.

As working capital continues to be a priority for companies, with constrained, expensive external financing, establishing efficient financial processes, visibility and mobility of funds will be paramount to maintaining competitive advantage. The lack of specialist technology is currently an impediment in China, but this is changing rapidly, and western competitors will need to continue pursuing higher levels of sophistication and automation in order to maximise their position.

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