Strategic Treasury

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Steps Towards Operational and Financial Efficiency in China Few companies can afford to ignore the opportunities for both sourcing and sales that China represents - but be ready for the differences in daily cash and treasury processes.

Steps Towards Operational and Financial Efficiency in China

by Jürgen Lutz, Head of Cash Management Asia Pacific Region, UniCredit S.p.A. Shanghai Branch

With China’s position as the world’s second largest economy firmly established, few companies can afford to ignore the opportunities for both sourcing and sales that China represents. UniCredit has more than 30 years’ experience in Asia and we have always been proactive in supporting our customers in both their day-to-day and strategic operations. Indeed, many people sent from treasury organisations from overseas are surprised when they first start working in China how different it can be to organise automated day-to-day cash and treasury processes in a regulated market. In this article, we offer some realistic insights into the challenges and opportunities for companies seeking to enhance their operational and financial efficiency.

The efficiency challenge

Treasury and finance has a major role in facilitating both day-to-day activities and strategic growth in every part of the world, including China. Although in many cases, treasury is centralised at either a global or regional level, companies typically set up a separate treasury and finance function in China. The primary reason for this is regulatory: RMB is not a fully convertible currency, and the cash and treasury management environment differs substantially from those of Europe and North America. Despite this, it may still seem surprising that so few companies have achieved a comparable level of operational efficiency in China to their treasury operations in other parts of the world. After all, the country-wide clearing system in China (CNAPS) is efficient and automated, for the purpose of domestic settlement. And for better interoperability between domestic and international clearing system, PBOC has announced the development of a new China International Payment System (CIPS) which aims to overcome manual overheads between SWIFT and CNAPS due to local language requirements for RMB cross-border settlement. The banking sector in China is extensive, with a variety of full-service domestic and international banking partners. Electronic banking tools are widely available from domestic and international banks and major technology vendors provide local capabilities and support in China.

There are, however a variety of reasons why levels of efficiency and automation amongst corporate treasuries remain low. Many corporations launched their business in China a number of years ago, often on a small scale initially. Legal and regulatory requirements were (and often still are) challenging. For example, supporting documentation for transactions needed to be submitted to banks, and this remains an obligation for most companies. ERP (enterprise resource planning solutions such as SAP and Oracle) and TMS (treasury management systems) were not used extensively in China and therefore these systems did not necessarily support local instruments. In addition, the initially small scale of some cash and treasury management functions did not justify an investment in automated systems, particularly when labour costs were low.

Building momentum

Despite the challenges, both historic and current, treasury and finance managers are becoming increasingly motivated to improve the automation of their operations and visibility over cash and risk. Firstly, with the increasing cost of labour, automation of processes and reporting is becoming a higher priority for local management. Secondly, the scale and value of companies’ activities in China have reached a level that senior management outside China are seeking greater visibility over positions and processes, and greater confidence in the quality of the control environment. Finally, while the regulatory environment remains challenging, the pace and nature of liberalisation are gaining significant international attention, so there is now a greater awareness at head office of the opportunities to enhance both operational and financial efficiency.

While the regulatory environment is becoming more liberal in China, it is becoming more stringent globally. Senior finance executives therefore need the same degree of confidence in compliance and controls in their China business as in other parts of the world. This is prompting many treasurers and finance managers, both in-country and at the company’s group treasury, to focus on rolling out the corporate ERP and/or TMS to standardise processes and reporting, and achieve greater visibility over financial positions in China. While treasury and finance processes may need to be adapted to local conditions in China, a common platform enables a consistent approach to control and reporting and oversight over cash and risk at a global level.

In addition to implementing internal systems, the need for integrated, secure bank connectivity is as compelling in China as in any other region to optimise payment efficiency and security, to ensure prompt access to balance and transaction information and enable processes such as cash positioning and reconciliation to be automated. Some local banks are not yet in a position to fully understand this integrated approach and respective communication with corporate overseas HQs, but these capabilities are typically an essential element of most international banks’ offering in China.

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