Regulatory restrictions on the movement of foreign currency capital and currency conversion have led to revenue becoming trapped in some of these markets, impeding efficient cash deployment.
For treasurers, currency convertibility and transferability, regulatory restrictions, capital requirements, tax rules and lack of visibility are among the most prevalent issues, as these translate into opportunity cost on investments, diminishing returns on assets and non-optimal balance sheet management.
Solutions that allow treasurers to unlock this trapped liquidity – such as the redeployment of cash for in-country growth, dividend payments, royalties/management and service fees, capital repatriation, intercompany lending and interest optimisation – are available, but more significant opportunity can be found in the relaxation of in-country regulations and capital controls for some of the most stringent markets. Treasurers and their banking partners should therefore ensure that they are at the forefront of current and forthcoming regulations, to capture any opportunities arising from these changes.
Cross-border Intercompany Lending Schemes in China
The most significant change in Asia over recent years has been observed in China, where the relaxation of regulations has dramatically impacted companies which have operations in the country or are looking to invest there. With the introduction of various cross-border intercompany lending schemes, treasurers now have several options that they can leverage to release trapped cash and better manage their liquidity in the region.
Prior to the relaxation of regulations, corporates operating in China were unable to lend their surplus cash to overseas entities and payments could only be executed for current account transactions. For treasurers, this has proven to be a liquidity management headache and ultimately an opportunity cost. However, over the past two years, Chinese authorities have gradually relaxed rules to enable treasurers to better manage their cash in region, or globally, by including the renminbi (RMB) into their global pools.
Since completing the first “non-quota” cross border RMB two-way cash pool sweeping transaction for Baoxin Auto Group in February 2014, Standard Chartered has seen significant adoption of cross-border intercompany lending techniques among clients. Multiple new schemes have since been launched by China’s regulators and these have opened up various channels for cross-border fund movements under the capital account. Additionally, these schemes are not limited solely to the movement of liquidity overseas, but also permit two-way cash pool structures. Treasurers have embraced this positive market relaxation and have been actively leveraging the various schemes to release trapped liquidity in China effectively.
Depending on corporate requirements, there are two main categories of cross border lending schemes available to release trapped cash:
- Movement of RMB liquidity offshore.
- Movement of foreign currency (FCY) liquidity offshore.
Treasurers seeking to move RMB liquidity offshore are leveraging the People’s Bank of China (PBOC) circular 168, issued mid-2013, to lend their RMB surplus liquidity to their overseas subsidiaries, parent company or other related parties, with no restriction on financing tenor or quota. Those looking to participate in an offshore cash pooling structure, but also requiring a flow of funds into and out of China, are utilising PBOC Circular 22 and 324 to achieve their desired RMB liquidity management as there are no quota controls on the outflow for RMB cross border schemes.
Foreign currencies can also be used in an offshore regional cash pool, via SAFE circular 23 and 26. However, a key differentiating point is that for foreign currencies quota controls are in place that restrict the amount of funds which can be swept offshore. A high-level overview of how these schemes is as illustrated below:
While these schemes have significantly increased the flexibility in unlocking cash in China, they can prove challenging to set up and manage and certain eligibility criteria have to be met. It is thus essential for treasurers to be familiar with the specific requirements such as quotas and reporting requirements, as failure to comply can result in penalties or regulatory sanctions. When participating in these schemes, quota management is a key component that a treasurer must manage, and this is where an automated quota management system would be invaluable in ensuring that quotas are closely adhered to.
However such challenges have not deterred treasurers in using these mechanisms and schemes to achieve greater visibility, control and flexibility in managing their onshore and offshore RMB denominated cash flow. Nokia Siemens Networks (NSN) is a fine example, where NSN China had utilised the RMB cross border intercompany lending scheme to lend RMB to their offshore related companies. Through the loan, NSN China was able to include the RMB into its portfolio of working capital currencies to better manage their global liquidity positions and streamline its treasury operations.
Maximising utility of trapped liquidity through global interest optimisation
Where re-deployment of an in-country surplus is not a viable option – or at least insufficient to cover all surplus cash – interest optimisation has proven to be a successful mechanism for treasurers. By considering the aggregated balances held by a corporate group across the bank, enhanced credit and/or debit rates can be offered to individual accounts. This enables treasurers to utilise the trapped cash to up-tier balances held in other markets. While a full offset between credit and debit balances may not be achieved as in a physical cash pool, interest optimisation would allow trapped cash to be used efficiently within regulatory boundaries.
In practice, interest optimisation can be a highly valuable tool when looking to manage liquidity across multiple restricted markets. For instance, an Australian corporate with operations in multiple countries – including regulated markets such as Sri Lanka, Korea, Philippines and Vietnam – had cash that was being underutilised in several of these markets with restrictions on overdrafts, interest rates, cross border transfers and inter-company lending.
By reducing the number of operating accounts and putting in place an interest optimisation structure across their accounts, they were able to improve visibility of cash positions and effectively utilise the trapped cash. The end result was enhanced interest yields and overall better utilisation of cash that could not be used in any other capacity.
Treasurers and their banks are better equipped than ever, with a suite of tools that enables them to fully utilise their cash positions across both trapped and free markets. However, the greater challenge lies in keeping abreast of regulatory developments. Being able to quickly assimilate into a new regulatory environment is the key to continued effective cash utilisation and optimisation of working capital, especially in more restricted markets.
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