Regional treasury centres (RTCs) in Asia have continued to gain momentum, says Sanjeev Chatrath, regional head of client sales management at Citi, and they can basically be separated into two categories.
The first group is made up of western multinationals. They are centralising treasury, largely to gain greater control in an environment where their Asian subsidiaries’ contributions to the bottom line are growing. These companies, he says, continue to drive the evolution of RTCs.
The other category is Asian multinationals. While some of their RTCs are set up as global treasury centres and are at the cutting edge, Chatrath says that others have RTCs that are still in the early stages of development. Many of the Asian multinationals’ RTCs are learning from western multinationals about how best to centralise their treasury operations.
A large number of the Asian multinationals setting up RTCs are from India, China, Korea or Japan, with an increasing number coming from Singapore, Australia and Thailand. Chatrath cites the example of an airline in southeast Asia, which consolidated its regional centres in the US and Europe, as well as other countries that handled operations for 40 markets, into a single centre in Asia.
The key drivers for multinationals to set up RTCs, according to Chatrath, are to manage cost, debt, foreign exchange (FX), risk, trade services and financing. Corporates have found that centralisation can also achieve greater scale and larger volumes, along with better positions through practices such as the netting of transactions. They also achieve greater control over cash and contingent liabilities. These benefits from RTCs are very different from those in shared service centres (SSCs), which are usually set up to reduce cost and increase efficiency,
Singapore and Hong Kong remain the traditional favourites for RTCs in Asia, Chatrath says, and each offers several advantages. Hong Kong has a low tax rate of 6.5% and no withholding tax on interest payments as well as deducibility of interest expenses and a small but growing number of tax treaties. While Singapore has a higher corporate tax rate of 17%, there is no withholding tax on interest and the Free Trade Agreements (FTAs) it has concluded give it an advantage for some companies.
Beyond these two main locations, there is an increasing range of options. Malaysia has set up an operational headquarters (OHQ) programme for treasury management centres, for example, and Thailand has set up a regional operations headquarters (ROHQ) programme with incentives that have already attracted 100 companies. Companies are also looking at China because it is regulated, has established business processes even if the RTC is in Hong Kong or Singapore, and is the region’s single largest growth opportunity.
While the selection of the location depends on the company and its home location, Chatrath says that Indian companies more often go to Singapore, while Chinese companies tend to opt for Hong Kong.
Several global and regional trends underpin the continuing growth of RTCs.
One theme is a fragile and stressed global economic environment. Chatrath expects sustained volatility in the markets for the next six to 12 months, with FX and geopolitical risks as well as the potential for natural disasters similar to those in Japan and Thailand last year. There is also the continuing social unrest in many areas in the Middle East. In addition, bank regulations such as Basel III are compounding the challenges. The result ofthis environment is decelerating global growth, with the potential for a lost decade.
At the same time, he argues that corporate balance sheets are in a position of strength. Furthermore, mergers and cash balances are at unprecendented highs while the cost of debt is low. Companies’ financial flexibility is thus also at an all-time high, so the organisations are well positioned.
Companies are looking, then, for a balance between being financially conservative in an uncertain environment and taking advantage of opportunities to leverage their strong financial position and expand. Along with this balance, Chatrath argues that a key priority is management and control. To achieve these objectives, treasury needs to set up the right policies for contracts, governance and control.
A second theme, he says, is supporting growth of the business. In Asia, companies that are expanding want a means to settle with their suppliers, collect debt and support the supply chain even when they are more remote. They are also looking for ways to improve operating leverage so they can continue to grow the top line.
The third theme is that progressive companies want to embrace new technology, such as cloud computing. Companies are figuring out how to reorganise treasury processes and leverage the cloud, or other technology, so that they can take full advantage of it to drive efficiency and control.
Looking ahead, Chatrath sees a continuing demand for cash flow forecasting and liquidity management solutions, along with ways to address risk and control points. Companies also want supply chain finance (SCF) solutions so they can manage their supply chain more effectively, while their treasurers require fraud management and surveillance so that they can increase their controls.
Lastly, mobile technology is another opportunity, says Chatrath. One project Citi undertook, for example, was to use mobile phones to eliminate physical cash in China, India and Korea.
To achieve their goals, corporates are likely to further expand the number of RTCs in the region, as well as the range of services they provide.
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