Moving cash out of China has long been a problem for multinational companies based there. Strict regulations that prohibit repatriation of cash mean that the only way companies can return funds to their treasury headquarters outside China is by paying an annual dividend. Paying the dividend is in itself a cumbersome process that requires extensive documentation such as audited statements by certified public accountants and proof that corporate taxes have been paid in China. These restrictions give rise to the main problem for treasurers in China: trapped cash. However, according to Bank of America, there are options that enable companies to manage their excess liquidity. One of the most common liquidity management structures, inter-company lending, is not allowed in China.
In his article Optimizing Liquidity Management in China, Ernest Mak, at Bank of America, outlines three approaches to managing cash efficiently within China’s regulatory framework. The technique of ‘leading and lagging’ (paying cash-rich entities as late as possible and paying cash-poor entities sooner) for inter-company cross-border trade is one method. Using a bilateral renminbi entrustment loan structure, or establishing a trading company in China are other ways of managing cash effectively. For more details on these methods and enhancing yield in China, read Mak’s article.
China’s FX Market
According to KC Lam, head of sales for Asia at Electronic Brokering Systems (EBS), a provider of electronic trading and market data for the interbank FX community, much has happened since 21 July 2005 – the date when the Chinese authorities finally lifted the renminbi’s peg to the US dollar. According to Lam, on 21 July, the country saw its biggest trading day with $211bn-worth of FX transactions. He says: “People were reacting to the change.” China is the second largest US dollar reserve in the world and therefore its FX markets have a huge impact on the world economy. Since 21 July last year, certain restrictions have been lifted that make it much easier for foreign companies to do business in China. Forward hedging, which was previously prohibited and unfeasible, is now allowed. Renminbi foreign currency trading with foreign banks is now also allowed. Lam says there has definitely been an improvement in terms of transparency. He adds: “People are able to plan better and it is going to be tremendously useful for companies that want to invest in China.”
FX trading has grown by 60.5 per cent between April 2001 and April 2004, according to Lam. He attributes this to the huge foreign direct investment in China during that period, and also to China’s growing personal wealth, with growing productivity, consumerism and credit growth.
EBS recently signed a deal with Bank of China, which is the biggest FX trader in China. It will enable the bank to gain access to, and participate directly in, the global FX markets. For more information on China’s FX reserves read China’s FX Reserves: Thinking Outside the Box by Tai Hui at Standard Chartered Bank.
Shared Service Centres
Companies are showing more interest in setting up shared service centres (SSCs) in mainland China – some are even moving their SSCs from Hong Kong to Beijing or Shanghai. However, establishing a SSC in China is not as straightforward as it is in other countries because companies must operate within the activities specified by their business licence. A SSC provides consulting and services, which would be outside the activities specified in many companies’ business licences. It is therefore often easier to set up the SSC as a new company and ensure that the business licence covers all of the areas that the SSC is intended to provide.
In their article Shared Service Centres in China, David Cox and Anthony Lloyd, of MinterEllison, warn that the “Chinese authorities can shut down a company’s operations with little or no warning if they discover that it is acting beyond its scope of business. This is a critical factor to consider in the context of shared service centre continuity planning.” Their article also covers other factors to consider when planning a SSC in China, such as ensuring that data privacy legislation is adhered to, particularly if the SSC is processing personal data from companies outside China (where data protection acts are more stringent than they are in China); and also which type of company structure to choose.
Investing in Chinese Companies
For companies interested in investing in a Chinese company, Investing in China – Successful Supply Relationships, by Steve Monaghan at Competitive Capital Management Group, gives some insight into the attitudes and values of Chinese managers and entrepreneurs. According to Monaghan, the Chinese are “great entrepreneurs and executors”. They place more importance on the value of a transaction, rather than the actual price. He writes: “Your challenge in China is to find a mechanism to minimize capital and value leakage yet harness the great Chinese entrepreneurial spirit.” Chinese managers are motivated by achieving an international initial public offering (IPO) and from a foreign investor’s perspective, this could increase entrepreneurial drive, and provide access to future capital growth.
Chinese banks have been dogged by their non-performing loans (NPLs) for years, although they were down to single figures in 2005 for the first time in history at 8.9 per cent (from 17.2 per cent in 2003, according to the country’s banking watchdog, the China Banking Regulatory Commission). However, some banks have far higher NPLs, for example the Agricultural Bank of China (ABC), whose NPLs are set to rise again following years of lending to failed enterprises and industries.
There has been a massive injection of funds from the central bank to the banks with NPLs. Many of the Chinese banks also intend to give an initial public offering (IPO) because this will help them to clear their NPLs. China Construction Bank (CCB) gave an IPO last year and it was the biggest ever IPO, at US$9.2bn (according to Reuters).
The next banks to put up IPOs are likely to be Industrial and Commercial Bank of China (ICBC) and Bank of China. These two banks, as well as CCB and ABC, are the so-called ‘big-four’ Chinese banks and are working on restructuring their capital. ICBC has announced a deal with Goldman Sachs, Allianz and American Express, which is an attempt to boost operations, according to Forbes, a financial markets data and news provider. ABC is the only one of the ‘big four’ not to have received a multi-billion cash injection from the Chinese state, and is the weakest of all four banks. For more detail on how ABC plans to restructure itself, and about China’s banking sector in general, read Asiamoney’s The Bank China Wants Us to Forget.
While many still think the banking sector is characterised by legacy systems and lack of innovation, this could not be further from the truth. 2018 marks the year when a multitude of external factors will shake up the industry once and for all and reinvent the way people bank. Inevitably, this presents a threat, but also an opportunity.
The Indo-US trade corridor is expected to grow to $500 billion by 2025. Currently, the two-way merchandise trade between these two countries is at $66.7 billion.
The global economy has seen about eight years of growth, but we are starting to see the end of this which is triggering some volatility in global markets, Stefan Bielmeier, DZ Bank, argued in his keynote speech at the Bellin annual 1TC conference. Other speakers discussed blockchain, cyber crime and netting.
A series of governments are now very worried about the idea of bitcoin and these currencies because customers would be able to make sustainable ongoing transactions and payments without having to ever introduce the use of a typical financial model or banking system. To combat this potential threat, several countries including major central banks like the Bank of England and the Bank of Israel will be launching their own version of a cryptocurrency. This could bring big advantages to customers.