An Eye on the Ball, Not Just the Headlines

An Executive Interview with Bruno François, Head of Transaction Banking, BNP Paribas China

With China experiencing a market correction and shift from an investment to a consumer-led economy, it is easy to take a negative view of the market, and the opportunities that exist. In reality, even with revised growth forecasts, China is still the world’s second largest economy with growth rates far in excess of most western markets. In this edition, Bruno François, Head of Transaction Banking, BNP Paribas China talks to Helen Sanders, Editor, about how corporate treasurers and their banks should respond to recent market events.

Some treasurers have been worried that the RMB liberalisation agenda has been derailed by the recent shocks to the Chinese economy. To what extent are these concerns justified?

Over the past five years, treasurers have become accustomed to good news in China. Almost every month, new opportunities for cross-border trade, domestic and cross-border liquidity, investment and process automation have opened up, which has set an expectation that RMB and wider market liberalisation will continue on a linear path. In reality, small steps, unpredictable timing and the use of pilot projects before wider market rollout has emphasised that the pace of change is defined by market conditions rather than a set agenda. However, when RMB started to depreciate in August 2015, some people were surprised at the interruption to the liberalisation journey and backward steps in some respects. These need to be seen as a response to changing market conditions, specifically to encourage inflows rather than outflows of capital, not the end of the liberalisation agenda.

Furthermore, the reduction in quotas and restrictions on outflow is not an assault on foreign corporations, but a means to avoid speculation that risks damaging the Chinese currency and economy. Treasurers therefore need to take a longer view, and see individual measures as steps along a winding liberalisation journey, even if some of these appear to be backward steps in the short term.

China is still a huge and growing market for many companies, but should companies be changing their strategy?

There has been a lot of negative news about the Chinese economy recently and its capacity to maintain its growth momentum, with currency depreciation, market shocks, revised growth results and forecasts, and changes in quotas, all of which inevitably cause concern. There is undoubtedly over-capacity in some sectors, particularly traditional industries, but others, such as services, tourism, pharmaceuticals, healthcare and technology are booming, which is not necessarily reflected in the headlines. The risk, however, is that continued focus on the slowdown, rather than the opportunities in China, will ‘talk down’ the market, resulting in an unfounded loss of market confidence. China is just as attractive a proposition as it ever was, but some companies may need to take a slightly longer-term view of their strategic objectives. RMB depreciation will affect the whole of Asia, with some impact globally, but it is important to let the government and central bank address the current issues and create stability and certainty, before focusing on medium- and long-term monetary measures, and fiscal and investment programmes. The lack of clear communication from the authorities may have exacerbated the volatility and the reactions from the market. Proper communication is key to creating certainty and confidence, and the Chinese government and regulators are now getting to grips with this. PBoC chairman Zhou’s interview at the Chinese New Year holiday could be seen as the start of the effort at communicating with the market.

To what extent should treasurers be revising their existing strategies in response to recent market events?

Market shocks often lead to paralysis amongst market participants, which is the worst possible response. Treasurers need to ‘hold their nerve’, keep sight of their business strategy and keep on pursuing it. Initiatives such as centralising treasury, implementing payment factories and optimising processes remain as important as ever, and can be very valuable in creating visibility over liquidity and risk, and control over cash and processes, that are now more important than ever. However, given that the nature and timing of regulatory change is uncertain, treasurers should maintain some flexibility and engage proactively with their partner bank to maintain up-to-date information and identify the best course of action.[[[PAGE]]]

For example, looking at cross-border cash pooling, the temptation is to take immediate advantage of evolving regulations by trying to implement similar structures to those already in place in Europe to centralise treasury: a typical plan, therefore, might be to implement two levels of cash pooling (domestic and then cross-border) with repatriation to the country where the global treasury centre is located (France, UK, Germany etc.). However, if there are temporary stops on cross-border flows, the domestic portion of the cash pooling structure may also be impacted, causing serious concerns about the domestic operation. Consequently, it is important to identify both domestic and international objectives and work together with the bank to find the most appropriate means of achieving them. For example, a three-level cash pool with domestic cash centralised in a non-resident-account (NRA) in China in the name of the offshore participant could be a solution to maximise flexibility.

How has the role, or strategy, of international banks changed as a result of the recent market shocks?

We have seen a considerable increase in the number of clients wanting to engage with BNP Paribas throughout this period. In particular, they recognise the value of our access to regulators, in-depth understanding of the implications of regulatory changes, and quality and depth of our advisory services, particularly during times of frequent policy changes. Some banks may find themselves over-extended and may therefore seek to roll back their commitment to clients in China, or exit the market altogether. This will inevitably have an impact on their clients, but it is unlikely to be the response of most international banks that have a well-established presence and long-term commitment to China, and a sustainable market strategy. In addition to supporting clients’ domestic and cross-border needs, we continue to play an important role in bringing an holistic approach to flow banking, bringing solutions for cash, trade but also hedging (FX and interest rate) at a time where market volatility and onshore-offshore disparity is forcing treasurers to adapt their hedging strategy. These are instrumental in fuelling healthy growth and promoting stability.