Aron Akesson, regional treasurer for Carlsberg, notes that his company has 20 legal entities and a cash pool in place in Shanghai, with a goal to “repatriate as much cash as we can to repay debt. Dividend was the route, in China.”
Carlsberg’s treasury set up a shared service center that took over payment processes and now has control of the business. “The key theme is that we have a very good team in Shanghai. We brought cash balances from about $1bn to about $100m,” he says.
Rachel Miao, regional treasurer for Dover Corp., says her company also has cash pooling set up in China. “With cash sweeping, we are able to link the China pool with Singapore,” she notes. “For China, we are in a cash-rich position. The only way to move cash out is to do a dividend.
Miao explains the challenges. “First, it will take three months to get approval. Second, the tax cost. The third one is the back office support,” she says. For cross-border settlement, it would be easier to do intercompany transactions than third-party ones. “The ideal model is use offshore CNH to pay back to China, as that will be an internal flow.”
Knorr-Bremse Asia Pacific Director Ernest Mui explains that his company is different. It doesn’t have daily cash inflow and outflow, so it doesn’t need daily cash sweeping. “At the end of the month, we see whether the companies have cash, we collect cash,” he says. “The policy in China is cross-border pooling.”
While Dover and Knorr-Bremse have entities in the Shanghai Free Trade Zone (FTZ), usage is relatively limited since the central bank is extending the benefits to many other parts of China. As Mui says, “the policies in the FTZ are intended to be a pilot. The regulation will go to other parts of China. We wait.”
Supply chain finance can be a challenge in China. Akesson says Carlsberg pushes suppliers for a longer payment terms. Miao says Dover is passing on bank acceptance notes to its suppliers, working with a global bank and pulling the suppliers on. “The suppliers can enjoy a preferential rate,” he says. “We extended the payment term from 45 days to 60 days and want 90 days. If they want payment faster they discount it.”
Managing and Investing Your Liquidity
A panel comprised of Subash Pillai, head of liquidity portfolio management APAC for Goldman Sachs Asset Management, Australia; John Chen, Asia-Pacific treasury director for Honeywell; and Tony Lam, Asia treasurer for Valspar Corp.; focused on how to manage liquidity in China.
“Honeywell’s cash investment policy is ratings-based,” Chen explains. “We can invest in corporate papers, government papers, revolving around the ratings.” The entities in China can get funding at the parent company at good rates, and outside the US, Honeywell does not have external borrowings. While it has set up the means to take money out of China, the company is not executing it because it gets good rates in the country, Chen notes.
Lam said his firm’s policy follows directions from the corporate treasurer and CFO, moving funds from open economies like Singapore and Hong Kong to the global capital account and paying out an annual dividend in closed economies unless returns are better locally.
Taking a broader perspective, Pillai said there are three key considerations: security, liquidity, and yield. “Products like money market funds (MMFs) and structured deposits have had a yield advantage, driven by a regulated market. There hasn’t been as much of a focus on limiting your credit risk measures as there has been an implicit government guarantee (though practices are changing). For yield, structured deposits are a way around what banks can pay.”
Looking at investment alternatives, Lam said his firm issues a lot of bank acceptance drafts, puts deposits with its local bank partner and invests in capital protected products. He has observed that multinationals are more conservative.
Confirming that observation, Chen says it boils down to counterparty risk. ”Certain structures we do not touch,” he explains. “Accounting wants mark to market. Some structures have greater volatility. We view counterparty risk the same as elsewhere. There is a limit on how much we can place with each bank.”
Looking across the market, Pillai says his firm’s client base invests in regulated deposits, MMFs, and structured deposits.
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