China Continues on Path Towards Internationalisation

Despite slowing economic growth China continues to be a key
market for many corporates and many organisations are investing in
treasury to support this growth. At the EuroFinance conference in
May gtnews met with Wong Kee Joo, HSBC head of payments and cash
management for China, to discuss the latest trends in the
country.

Although treasury expertise in many parts of China is still
limited, Wong believes that its companies have a big onus on them
to manage money well. Firms are therefore taking a variety of
approaches to bring in or develop their treasury knowledge.

According to Wong, some privately owned enterprises have
brought in foreign experts to redefine the organisation from a
treasury perspective. State-owned enterprises, on the other hand,
are more home-grown and often look to select banks for the
expertise they need.

Banks have a key role in providing consultancy services, and
in sharing information about underlying channels and processes that
need to be set up. They support this consultancy role by using
networks and linking corporates up; for example by bringing
together one corporate experienced in shared service centres (SSC)
with another that needs to understand them. When clients are
setting up SSCs, banks also often come in on the back end to
provide the underlying infrastructure, such as host-to-host or via
the Society For Worldwide Interbank Financial Telecommunication
(SWIFT) connectivity for processing payments from a single
point.

In addition to banks, local corporations are also looking to
other experts to provide treasury skills. Wong says that consulting
firms often provide treasury advice; demonstrating to companies
best practices and how to perform specific functions. Some
companies also bring in outsiders to work inside the company, who
may be foreigners with treasury experience or Chinese who have been
working overseas.

In addition to building expertise within China, companies are
also developing it overseas as they expand abroad. A key part of
the Chinese government’s timeline, its five-year plan to 2015 is
primarily designed to push Chinese corporates offshore. As they do
so, many are leveraging advice from banks or consultants and
bringing in locals from other organisations to assist with the
actions needed from a treasury perspective.

The Treasury Back Office: Shared Service Centres

One development Wong has noted is that companies are setting
up more SSCs in China. As it is difficult to find people with the
right skill sets – and as companies with far-flung offices often do
not want each finance team in each city to handle transactions –
they are using SSCs in locations such as Dalian, Shenzhen and even
Shanghai to cater to their growth. He expects these SSCs to
continue to expand, with some beginning to handle operations for
North Asia or other parts of Asia once they have developed services
for China.

Regional treasury centres (RTCs), on the other hand, need more
expertise and are more often located in places like Singapore or
Hong Kong, due to China’s regulatory environment and given that
staff in China often still lack the expertise to handle complex
needs, such as derivatives or hedging
requirements.

Trapped Cash

For foreign companies, trapped cash still remains an issue and
Wong reports that “there’s no simple answer in terms of what they
can do.” In many cases corporates make the decision to reinvest
their cash in China because the country is still growing, while
others have taken the “obvious” steps such as dividend payments,
capital reduction, inter-company trade payments or royalty payments
to mitigate trapped cash.

Increasingly, though, he sees corporates using liquidity
management solutions or cash concentration under entrusted loans to
optimise their cash. Since inter-company loans are not permitted in
China, companies have to set up an entrusted loan structure if one
company wants to pass cash on to another. Wong describes an
entrusted loan structure as simply a process whereby one company
entrusts their money to the bank, which then acts as an agent to
lend it on to another company.

Under the entrusted loan framework companies are using sweeps,
whereby any surplus gets swept into a concentration account where
it can be invested in seven-day calls, time deposits, money market
funds (MMFs) or other higher yield investments. However, since each
daily sweep incurs a business tax banks have been working with
corporates to ensure that these cash concentration structures are
tax-optimised. Many structures are then positioned to minimise the
amount of sweeps, and the resulting business tax, by using a
virtual account.

Sweeps underpinned by entrusted loans are also one mechanism
for companies to on-lend their money to one another. These loans
typically were underpinned by bank guarantees, since companies
wanted to ensure they would be paid back. This changed when
regulators introduced a rule in 2011 that prohibits bank guarantees
to support third-party entrusted loans. Wong says that this change
cut out many third party entrusted loans to unrelated parties.
However, some companies are still willing to undertake third party
entrusted loans to support their supply chains.

Instead of banks, credit companies provide third-party
entrusted loans to their distributors, which can then use the cash
either to buy products or as working capital. The interest rate
they charge is not exorbitant, as it forms part of the strategy to
support the supply chain. These companies undertake their own risk
assessment and counterparty risk of their known distributors, and
on-lend to them via such third-party entrusted loan structures.
While they do take the risk, they are also assured that their
supply chain is being looked after.

Evolution of the Regulatory Framework

The rule about bank guarantees is just one of what Wong says
are many regulations being introduced in China. He notes that
regulators are very keen to get an understanding of how their
regulations impact corporates. As a result, they are turning more
to the banks for advice, given that most have a rigorous
know-your-customer (KYC) policy and a much better understanding of
corporate requirements. This is reflected in progressive policies
as regulators are getting a better understanding and, in some
cases, modifying regulations in response to the environment.

By staying close to the regulators and assisting them as
needed, banks can also understand the regulations better and
provide improved consultancy services or advice to their clients.
As one example, Wong says that he sits on the State Administration
of Foreign Exchange (SAFE) Forex Magazine Council as a vice chair
and gains a better understanding through the role of what
regulators are focused on. He is also able to better inform
regulators of customer requirements and provide them with
feedback.

Renminbi Internationalisation

The government is continuing to work on internationalising
China’s currency the renminbi (RMB), and many changes are
underway. One key change on the current account side, Wong says, is in
trade-related payments. In the past, companies making foreign
currency payments from onshore to offshore had to provide
documentary proof of what the payments related to. They did so by
submitting a contract, an invoice and a customs declaration form to
their bank. The bank then had to review and match the three
documents before processing the payment. It was an operational
burden for both parties.

A new regulation, introduced in December and piloted in five
provinces, enables A-rated companies to provide just one of the
three documents. Along with greatly reducing the operational burden
for corporates, the change may enable them to centralise their
foreign currency payment transactions. To support this change SAFE,
the taxation authorities and customs have all linked their systems
from the back end. The new rule is likely to roll out across China
in the second half of the year.

On the capital account side, Wang reports that a key focus is
allowing RMB to be reinvested back into China. Previously,
corporates would use dollars, euros or pounds when they made a
capital injection into China. However, in October 2011 the
government announced regulations that enable corporates to bring
RMB into China. Corporates that raise RMB outside China through a
bond issuance or a simple foreign exchange (FX) transaction or
borrowing can now bring it into the country as part of their
foreign direct investment (FDI) or as a shareholder loan, and they
achieve multiple benefits.

Corporates can use the funds more easily onshore and may also
lower costs, as there was previously a charge for every conversion
when companies brought foreign currency into China. It is also
faster as the onshore funds are already in RMB and there is no
longer a need for onshore foreign currency conversion, which still
requires approval from SAFE. The FX risk is also lower, as
corporates can hold funds domestically in RMB while waiting to use
them for a project rather than holding funds in foreign currency
and potentially incurring a loss if the RMB strengthens.

Wong says that he is also seeing more usage of RMB for
intra-company payments. There are, however, slightly fewer RMB
payments to suppliers. The key issue is whether suppliers offshore
are willing to accept RMB. If a corporate accepts RMB payments, its
business model needs to provide support. If they do not have a way
to use the RMB, however, they are less likely to accept it since
investment opportunities may be limited.

Many companies are taking steps so that when RMB utilisation
does happen in a big way, they are prepared and their systems cater
for it. They are working to put additional currencies into the
enterprise resource planning (ERP) system, produce invoices in RMB
and enable communications with the counterparties receiving the
invoices to ensure RMB is acceptable to them. So it’s not a
question of whether full RMB internationalisation will happen, but
how soon.

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