by Helen Sanders, Editor
With China continuing to be a major strategic growth market for corporations of all sizes and industries, many participants in BNP Paribas’ 8th Cash Management University were keen to understand the evolving opportunities to manage RMB more efficiently and integrate RMB balances into regional and global liquidity structures. Bruno Francois, Head of Transaction Banking, Greater China, BNP Paribas outlined some of the emerging opportunities, while Astrid Thorsen, Head of Business Intelligence Solutions, SWIFT then outlined some recent trends and statistics. Finally, Thomas Morel, Asia Treasury Director, Veolia and Meena Dafesh, Director of Treasury, Asia Pacific and MEA, Ingram Micro, discussed how they are leveraging opportunities for domestic and cross-border liquidity in RMB. The workshop was moderated by Helen Sanders, Editor, TMI and Director of Asymmetric Solutions.
Mapping the journey
Bruno Francois, BNP Paribas first summarised the history of RMB liberalisation to date, from the launch of the pilot cross-border trade settlement programme in 2009 through to the launch of the China (Shanghai) Pilot Free Trade Zone (SFTZ) in September 2013. He also noted the recent expansion from an area of 29km2 to over 120km2 including Lujiazui, the city’s financial hub and the location of a large number of regional headquarters for both multinational and Chinese companies. In addition, new free trade zones in Guangdong, Tianjin and Fujian were announced in April 2015.
A highlight of this liberalisation journey so far has been the ability to include RMB in cross-border cash pools, as Bruno described,
“In February 2014, entities in the SFTZ were allowed the opportunity to include onshore RMB (CNY) balances in two-way cross-border cash pools for the first time with only limited conditions. Although this ability was extended across China in July 2014, the restrictions are far more stringent.”
He proceeded to outline these opportunities in more detail,
“Specifically, a registered entity in the SFTZ needs to act as the pool header, and only cash flows generated from operating activities (i.e. not borrowed funds) can be included. No approval is required, and flows within the cash pool are not subject to a quota.”
With the recent expansion of the SFTZ, however, a far larger group of corporations are able to take advantage of these opportunities, which is significant given the more onerous restrictions of the pan-China scheme. Bruno continued,
“Entities need to have been incorporated in China for a minimum of three years, with a minimum turnover both in China and globally. In addition, the sweep amounts are subject to a quota.”
He also emphasised that although cross-border cash pooling is a major step forward, its relative advantages need to be considered alongside other liquidity management solutions that are available, such as intercompany lending. For example, cash-rich corporations with large cash balances in China are successfully using cross-border intercompany lending as a way of leveraging cash in China for the benefit of overseas entities. Given that this is already a flexible and straightforward solution to adopt, cross-border cash pooling may not offer additional benefits.
Quantifying progress
Astrid Thorsen, Head of Business Intelligence Solutions at SWIFT continued by illustrating the increase in the use of RMB as a clearing and settlement currency with rapid growth in corporate demand. SWIFT has an important role to play in facilitating the development of RMB as a world currency. Astrid explained,
“By the end of 2014, SWIFT had a significant customer base in China, with 344 users, including banks, corporates and securities firms. We are also witnessing active community engagement amongst these users, with a variety of member groups within China and active participation in SWIFT Business Forum and Standards Forum, highlighting the recognition of SWIFT’s strategic role in facilitating cross-border flows in RMB. Indeed, since 2010, we have seen substantial growth in SWIFT FIN transactions from China.”
The main payments corridor from China is currently to the United States, with significant SWIFT traffic between China and United Kingdom, Hong Kong and Germany. At the end of 2014, RMB broke into the top five payment currencies globally, representing an increase of 321% over two years. By May 2015, 1,081 financial institutions were using RMB for payments with China and Hong Kong, representing 35% of all institutions making international payments to and from these locations, a 22% increase over the same period.
Astrid continued,
“The number of RMB clearing centres is also growing. While in the past cross-border RMB flows were cleared in Hong Kong, there are now 14 clearing centres with a clearing bank approved by PBOC, four unofficial centres approved by the local central bank and further centres in progress. The ability to clear RMB in Europe, North America and other parts of Asia, is fuelling RMB internationalisation through the increase in demand from multinational corporations, although Hong Kong remains the top offshore centre by value (72%, April 2015)”. [[[PAGE]]]
She then explained some of the key elements of SWIFT’s strategy in China over the next few years. First, promoting SWIFT connectivity amongst banks, corporations and securities firms, and working with payment infrastructure providers in China to promote integration and standardisation. Secondly, evolving and developing solutions to support and facilitate RMB growth, including business intelligence and analytics, further promoting the RMB tracker and offering messaging transformation software. Finally, engaging users in China in standards and compliance initiatives, such as the RMB working group, KYC registry and sanctions screening.
Astrid concluded,
“There are three key steps for RMB to become a truly international currency: a global trading currency; a global investment currency and finally a global reserve currency. RMB is already firmly positioned as a global trading currency, and is now the second most used currency for documentary credits globally. It is also well on its way to becoming a global investment currency, with the PBoC pledging to further liberalise RMB capital account controls in 2015. At least 60 banks have invested in RMB, and the IMF is ‘optimistic’ about the prospect of adding RMB into the SDR (special drawing rights).”
From domestic to cross-border
After a number of questions from workshop attendees, Thomas Morel, Veolia described the progress that Veolia is making towards efficient domestic and cross-border RMB liquidity management. With sizeable operations across China in water, waste and energy involving over 100 entities in China and Hong Kong, including numerous joint ventures, with diverse cash flow profiles, managing cash in China is a highly complex undertaking for Veolia. Capital and foreign exchange controls, foreign debt quotas and regulated interest rates create challenges, but there are numerous local and national government bodies and administration centres to deal with, which often have different practices and approval requirements.
As China’s journey towards liberalisation has progressed, Veolia has evolved its approach to cash and liquidity management. Before opportunities to leverage RMB liquidity became available, treasury held surplus cash in secure investments onshore in China at an attractive yield. As liquidity opportunities started to emerge, Veolia started to implement entrust loans to controlled entities. The next step, which has recently been completed, is to pool cash within China, which is now being followed by cross-border cash pooling and the transfer of RMB funds out of China for group liquidity purposes. Thomas discussed this initiative in more detail,
“At the start, we had four business lines reporting separately to Paris, comprising 32 entities under Veolia’s control, with 150 bank accounts across 18 banks. Given the scale and complexity of the operation, we had varying degrees of control over cash, and entities were at different levels of cash management maturity and technology sophistication. Our aim was therefore to centralise cash, streamline bank relationships, enhance bank connectivity and ultimately enable cash repatriation. Through these initiatives, we would increase visibility and control over cash and support liquidity objectives both within China and at a group level.”
He continued,
“We appointed BNP Paribas as our partner bank, leveraging a strong partnership for our waste business in China, and in other parts of the group. BNP Paribas also offered expertise in project management and the commitment to meet our need for a fully automated domestic and ultimately cross-border cash pool.”
Having appointed BNP Paribas in March 2014, Veolia went live with the domestic cash pool with 15 entities in June. By September 2014, the cash pool was fully implemented across all 32 entities, and the company was able to cancel pool members’ overdraft facilities. The cash pool operates on a zero balance basis with an optimised interest rate system. Balances and intraday movements by cash pool participants are reported automatically every day, with email alerts for overdraft limit breaches. Thomas concluded,
“We are now considering connecting the cash pool header account to the entity in the SFTZ, which will then be linked to Veolia headquarters’ account in Hong Kong. This allows us to repatriate cash surpluses to France, while also enabling us to fund cash shortfalls in China from group funds where necessary. As this will be an automated solution, the disruption to group operations in China will be minimal, without the need for manual intervention. There remain challenges, of course, not least the fact that regulations are often subject to interpretation, but we have a reliable experienced partner in BNP Paribas.”
Starting the journey
Meena Dafesh, Director of Treasury for Asia Pacific and MEA of global leader in technology and supply chain services Ingram Micro, then outlined the project on which she and her team are embarking to optimise cash and liquidity management in RMB.
“One of the difficulties of planning cash and treasury management projects in China is the speed of change: when we launched our cash management project, the proposals we received from banks were out of date two weeks later. This is exacerbated by lack of clarity and differing interpretations. However, these are challenges rather than barriers given the scale of opportunity that now exists, such as cross-border cash pooling, through either the SFTZ or pan-China programmes.”
With $10bn revenues in Asia Pacific, of which China is one of the largest countries by revenue, the business imperative for Ingram Micro to optimise cash management was considerable. As Meena explained,
“Branches of local banks typically operate independently, and with high cheque volumes, we were obliged to open bank accounts in each location. While the objective was to centralise cheque collections in one city, this was expensive to do with a local bank due to high cross-city charges. Furthermore, it was difficult to implement cross-border cash pooling as the relevant infrastructure is not yet well-developed by local banks.”[[[PAGE]]]
Treasury has therefore embarked on a project to rationalise bank accounts, centralise cheque collections in Shanghai, improve visibility and control over cash, optimise the use of working capital and reduce funding costs, and support group liquidity objectives through cross-border cash pooling. Having selected a partner bank, Ingram Micro needed to decide whether to set up an entity in the SFTZ or to use the pan-China cross-border cash pooling scheme. The preference was to use an existing entity that fell within geographic scope in the expanded SFTZ as no regulatory approval is required, and all entities in China can participate by setting up a domestic pool, and linking this to a header account in the SFTZ which is then connected to a cross-border pool. Furthermore, unlike the pan-China programme, there is no PBoC limit on incoming funds. This raised some new questions that need to be addressed in the early stages of such a project, as Meena demonstrated,
“We need to decide where the cross-border pool will be headed, and we are comparing various locations to decide which will prove the most tax-efficient. The nature of the entity in the SFTZ is also important: will it be a pass-through entity, or an entity with substance? There are other issues too: what is the tax impact of both the domestic and cross-border pool? Will we have a thin capitalisation challenge? What offshore source of funds do we want to use? Finally, we need to be clear how we should calculate the inbound working capital and outbound free cash flow limits, given that the regulations are not always clear.”
Companions in the journey
Participants agreed that key to the success of cash and liquidity management initiatives in China is the ability for partner banks to provide solutions that offer value to an organisation at both a local and global level. Dialogue and collaboration between treasury operations in China with the wider group typically results in tailored solutions that directly support the corporation’s commercial objectives. By working with a global bank that has the local presence and expertise in China and in the corporation’s home market, treasurers can engage in active dialogue, understand local and global objectives and constraints, and construct tailor-made solutions to connect China into the global business.
