Published: April 01, 2013
In this interview, we welcome Kee Joo Wong, Head of Global Payments and Cash Management, HSBC Bank (China) Company Limited, who discusses the current status of some of the financial liberalisation initiatives in China. In particular, he emphasises the value of participation in pilot schemes and maintaining an awareness of opportunities for cash and treasury management liberalisation.
Although we are witnessing relentless progress towards financial liberalisation in China, the pace is steady and controlled. Effectively, the approach is to “cross the river by feeling the stones”, an expression first used by Deng Xiaoping. Each step in the journey is taken through a pilot project, in which a new initiative is introduced to a limited group of banks and their customers in one or more cities. Based on the success of the pilot project, initiatives can then be rolled out more widely. This is a pragmatic approach bearing in mind the scale and diversity of the business community in China, and each pilot project is focused and conducted relatively quickly. For example, the RMB cross-border trade settlement pilot was first launched in 2009, and has since witnessed rapid growth, with now almost all exporters across China having the ability to settle trade transactions in RMB. This has clearly led to the rise of the use of RMB as a trade settlement currency. As of January 2013, RMB has overtaken the Danish krone and Russian rouble to become the 13th largest currency on the SWIFT network (source: SWIFT). From an investment perspective, almost 35% of foreign direct investment into China is now in RMB.
Recent months have witnessed a variety of crucial RMB and foreign currency pilot schemes. For example, schemes to simplify cross-border trade settlement in foreign currency will streamline trade processes, reducing the documentation required from three separate documents to just one. This is becoming possible through greater interaction between separate government departments (such as tax and customs) and integration between their systems. There are also RMB simplified trade payment pilot schemes in select cities, where customers who apply with nominated banks, such as HSBC, will not need to provide documentation for RMB cross-border trade settlement transactions. The benefits to both Chinese and foreign corporations in China are clear: payment processes can be conducted more promptly and efficiently, and can be centralised into a payments hub or shared service centre more easily. Payment timing can be predicted more easily, enhancing working capital and cash flow forecasting.
Another important initiative is an umbrella liquidity optimisation pilot from SAFE, currently being rolled out in Shanghai and Beijing, to support foreign currency cross-border sweeping, netting, payments-on-behalf and gross-in, gross-out settlement. This is significant because it provides opportunity for treasurers to manage their cash efficiently in China, and by including multiple techniques, treasurers can define their cash and treasury management structures in China that are appropriate to their business. For example, HSBC has been the first foreign bank to enable a major customer in the pilot scheme to set up a foreign currency, cross-border cash pool to link their surplus foreign currency cash balances in China with their overseas cash pool. This facilitates better working capital management, and ease of investing back into China. For another customer in the pilot project, HSBC has implemented a tailor-made cross-border, foreign currency netting solution that allows the company to net off its inter-company payables and receivables. Recently, SAFE has also introduced the ability for companies to utilise their surplus foreign currency in China, to perform foreign currency cross-border lending to their parent overseas.[[[PAGE]]]
Additionally HSBC has enabled a customer to use RMB to settle cross-border payments and collections on a gross-in, gross-out settlement basis, with the parent company’s overseas treasury centre, which can then be settled directly with the counterparty through a payments factory or shared service centre. Before this, each transaction had to be settled on an individual basis directly with the counterparty, increasing transaction costs and currency risk, and fragmenting payment processes. The model eliminates foreign exchange exposure, optimises liquidity management for the company, and sets a precedent for other multinationals that will ultimately help boost circulation of the RMB outside mainland China.
Corporations have been awaiting the introduction of RMB cross-border lending. This pilot programme was introduced in September 2012, with the first transaction conducted in December 2012. The ability to use surplus RMB to fund projects and finance group companies outside China is potentially very attractive to both Chinese and foreign multinational corporations. However, it is important to seek the right advice when considering how best to leverage new opportunities. For example, treasurers should be aware of the lending quotas that are in place when thinking about using RMB to lend overseas. Consequently, companies should demonstrate that they have sufficient equity to support the business within China before being considered for cross-border lending, and should not have outstanding borrowings in China.
Yes, we are seeing an acceleration of financial liberalisation affecting cash management in China, where treasury management solutions are being progressed relatively quickly – albeit on a pilot programme basis. We anticipate this to continue rapidly in 2013. From a RMB perspective, we will also continue to witness further liberalisation. A catalyst for this has been the need to include excess RMB balances in China with a company’s offshore RMB pools (located in places such as Hong Kong, Singapore and London) to optimise internal regional / global treasury management flows and efficiency. Hence, we anticipate new pilot projects for RMB cross-border sweeping very shortly, a continued development as part of China’s objective for RMB to become an international currency.
As the pool of RMB liquidity grows in locations outside China, the need for an offshore clearing mechanism to facilitate RMB transactions increases. For example, Singapore could possibly become another RMB clearing centre for Asia, in addition to Hong Kong, and London for Europe. These clearing infrastructures could be linked when the new RMB international payment system in China, CIPS (China International Payment Scheme) is rolled out, anticipated late in 2013. This will be based on SWIFT standards, including ISO 20022 formats and ISO currency codes, facilitating straight-through processing and greater international cohesion.
Financial liberalisation is set to continue as we move towards China's objective that the RMB wil be a leading currency offshore, and cities such as Shanghai or Beijing for example, major international financial centres, by 2020. The regulators are not pursuing this strategy in isolation, however. The collaborative nature of the pilot schemes, including the regulators, banks and corporate customers, means that treasurers have an important role to play in shaping financial liberalisation and prioritising new developments. It is important that treasurers remain up to date not only with new opportunities to enhance their cash and liquidity management position in China, but also understand which pilot projects may be relevant to their business. By becoming involved in pilot projects, companies can help to shape new developments and gain early advantage.
Treasurers can achieve this by staying close to the banks that understand their business, and having a close working relationship with regulators. Regulators would often prefer the banks to make introductions to corporate treasurers and finance executives, not least because there are far more corporates than banks! However, the relationship between corporates and regulators has changed dramatically in recent years as a more open dialogue emerges between financial participants, so many corporates are now engaged in direct conversation with regulators.
The first priority should be to find ways to optimise cash flows in China. Lending rates remain high, so it is important to leverage idle cash balances as far as possible. Secondly, treasurers should look at their use of RMB and explore the new opportunities that exist.
Treasurers need to maximise operational and financial efficiency in their operations to sustain future growth - within and beyond China. Resourcing and financing costs remain high, so creating scalability is essential. Many entities in China have the potential to act as shared service centres across Asia, but this is only achievable with the right infrastructure and expertise.
Finally, it is vital to maintain an awareness of new opportunities as they materialise. Working with the right bank that understands potential regulatory landscape changes, has the geographic reach and skills in managing cash and liquidity both in China and beyond is an essential way of taking early advantage of emerging opportunities.
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