Centralisation in China

An interview with Lisa Robins of J.P. Morgan

We are delighted to return to our new series of interviews with key individuals in the banking sector. This month, we are pleased to introduce Lisa Robins, Managing Director, J.P. Morgan Treasury Services China Executive and Beijing Branch Manager, who talks about the challenges and benefits of centralisation in China.

To what extent are companies centralising their treasury activities relating to China - either within China or as part of a regional treasury centre including China?

China - known in Chinese as the Middle Kingdom - has always considered itself a natural hub for global business activity. Many multinational companies are now trying to enter the market to take advantage of the growth, consumer market size and innovation.

But many people forget how large China is - the land mass is roughly equivalent to Europe. Like Europe, China has one currency, the RMB (Chinese Yuan), - but unlike Europe, which aims to standardise rules and regulations across the European Union, - companies operating in China must deal with many different regulations - local, provincial, and central, and the sometimes varying interpretations of all these regulations. Corporates need to navigate the regulatory environment carefully, thereby making centralisation more complicated; nonetheless, we are seeing an increasing number of companies looking to centralise some or all of their treasury activities in China

An example of a company’s efforts towards centralisation is the use of concentration accounts or entrust loan structures, that allow corporations to pool and lend cash from cash rich entities to cash poor ones, within the same organisation.

Corporates need to navigate the regulatory environment carefully, thereby making centralisation more complicated

Another example would be the centralisation of payment management for RMB, which was made possible through the introduction of CNAPS (China National Advanced Payment System). Some large corporates have established “payment factories” giving them the ability to leverage one banking partner to handle all RMB payments.

USD or foreign currency payment centralisation has also emerged, but a key hurdle to that process is local compliance checks required for supporting documents.

J.P. Morgan provides a wide range of treasury services dedicated to helping customers achieve these goals and better manage their working capital in China.

What specific benefits does treasury centralisation in China offer?

Centralisation of treasury activities in China, like anywhere else in the world, offers companies the ability to achieve higher efficiencies, greater transparency and access to real-time information across a broad geography and many entities. Customers can thereby maximise their use of cash, evaluate risks and their patterns, consolidate bank relationships, and negotiate better use of liquidity surpluses.

What are the specific issues of gaining visibility over cash flow in China? Are there any specific issues relating to payments and collections which treasurers need to be aware of?

As I mentioned earlier, China is a large country and corporates have to rely on their banks to provide information on payments. Very often, the quality of information can be inconsistent. Therefore, working with an institution like J.P. Morgan that has strong information reporting systems is essential.

Also, China is unique in that accounts are segregated based on intended usage of the funds; thus, funds cannot be consolidated into one account. Corporations must maintain multiple accounts, which means dealing with various banks in different locations, thereby restricting visibility across all their banking transactions.

Aggravating the situation is the fact that there is no universal standard for RMB multi-bank reporting. Furthermore, SWIFT does not currently support Chinese language characters. [[[PAGE]]]

In what ways would you say that treasurers manage working capital and deliver efficiency improvements more effectively in China?

Working capital management is crucial for treasurers; and in China, there are additional constraints on managing it well. For example, the regulatory environment can make straight through processing of foreign currency difficult, if not impossible, given the extensive paperwork required, which adds cost to the processing environment.

One critical area that clients can review is their banking relationships - are they working effectively with their bankers? Do they have too many relationships? Can their bankers support them with all their information needs across the market?

In China, customers need to strike a balance between optimal account structure and mitigation against concentration risk, and between risk and efficiency.

Establishing the optimal number of banking relationships to ensure working capital needs are met, particularly when market conditions change, is a new concern for many treasurers who were used to easy access to capital and liquidity.

In China, companies that have traditionally had strong relationships with one or two banks are now considering the expansion of relationships to ensure that they get the working capital that they need when they need it - trading efficiency for access. By the same token, corporates only want to work with banks like J.P. Morgan that have demonstrated strong risk parameters - so the challenge becomes: how do they weigh the risk of working with a variety of institutions against the need for working capital?

What advice would you offer to companies which have either decentralised or partially centralised activities today?

Continue to look for ways to centralise and standardise - too many divergent processes cost money. Also, we advise clients to make sure that different parts of their organisation are working in tandem. A good example of areas to centralise would be supply chain finance - ensuring that logistics staff, trade finance and treasury groups are working together to know where and how to save money, reduce expenses related to inventory, finance, or transportation, thereby releasing working capital from within the institution.

What are the cash management related issues to address when investing in China?

Some of the key issues companies are experiencing include:

Risk management

Companies are clearly more concerned than ever about safety and security - and as a result we are seeing a flight to quality - placing funds with and conducting transactions through institutions that are considered safer havens and have performed well during this period of tremendous uncertainty.

Given tight liquidity, cash managers and treasurers are concerned first and foremost about having sufficient working capital, protecting their capital and investing it safely; access to liquidity is critical as is protecting their assets - companies are beginning to realise that security and liquidity are more important than price. [[[PAGE]]]

With that in mind, they are re-evaluating and strengthening their risk practices (ranging from operating to market risks) and being more disciplined about the criteria used to select their financial partners - they want to know how the bank has fared during the financial crisis, how the bank conducts its own risk management and how it makes risk, counterparty and investment decisions.

One critical area that clients can review is their banking relationships- are they working effectively with their bankers?

Clients are moving deposits and business to “safer havens” away from providers whose balance sheets and risk profiles have come under public scrutiny. At the same time, however, there are customers who are worried about ‘keeping all their eggs in one basket’; they want to make sure that they keep their options open given the tight liquidity and uncertainty in the market, in order to protect their assets and their access to the markets.

As one regional treasurer told us “never have we received so many calls from our head office to understand which banks we are working with, why, and how we are managing the provider risks”

So during this period of volatility, companies have to clearly weigh all their alternatives and risk policies to ensure that they are protecting their capital while still keeping options open for getting credit and liquidity.

Foreign Exchange (FX)

Treasurers have to make decisions regarding FX mainly based on two factors - first, regulatory factors, i.e. can free FX conversions happen for the funds in question? If not, how can they mitigate the FX risks? If yes, then it leads to the second factor, i.e. the company’s forecast for its FX flows - for example, treasurers will need to decide how much foreign currency to retain given potential payment liabilities in certain currencies and how to mitigate these exposures.

What advice would you offer?

Treasurers seek to move, concentrate and invest funds easily. China has made great progress in its banking and financial industries, and continues to make improvements. Some of the areas that may require attention are the variety of regulatory bodies and the lack of standardisation across China, requiring companies to have strong and knowledgeable individuals in their compliance groups. Avoiding the risk pitfalls is only possible if you have the right expertise in-house or from a reliable partner with in-depth market knowledge such as J.P. Morgan.

J.P. Morgan’s long-standing presence in China places the firm in a unique position to offer expert advice and solutions to multinationals wanting to establish a presence or conduct business in China.