Published: March 01, 2013
Our clients are primarily focused on capturing growth opportunities, and the most apparent ones are in the emerging markets, in which trading volume is expected to make up 40% of global trade flows in 2030. This is a huge leap from today’s 18%. Both China and Africa, for example, are compelling regions. While many multinationals have been present in a number of Asian and African countries for many years, their involvement has been relatively limited in many cases. Today, however, these regions are pivotal to many corporate growth strategies. While growth in Africa is starting from a smaller base, its growth trajectory far exceeds that of many other markets.
Growth strategies often extend into less familiar, and highly diverse territories, but we are finding some consistent objectives amongst treasurers:
i) Extend existing capabilities and liquidity structures into new markets to optimise visibility and control over cash.
ii) Comply with diverse regulatory requirements, culture and market practices, and respond to evolution in the financial infrastructure in new markets, whilst maintaining financial and operational efficiency.
iii) Understand and take advantage of emerging opportunities to use RMB.
Companies are increasingly centralising their Asian cash and treasury activities through regional treasury centres (RTCs) providing on-the-ground treasury support, while remaining closely integrated with treasury centres in other regions. In the past, many treasurers managed their Asian business from Europe, but this proved challenging for a variety of reasons, not least the timezone difference, lack of proximity to the business, and diverse regulations and market infrastructures are just some of them. Now an increasing number of multinational corporations have developed sufficient critical mass in Asia to justify setting up a regional treasury presence. Companies are therefore in a better position to develop specialist expertise on regional treasury issues, such as restrictions on liquidity and FX management techniques, and the complexities of the regulatory environment and market infrastructure.
Technology plays an important part in enabling companies to achieve their cash and treasury management objectives. Enormous advances in treasury management and banking technology continue to help treasurers achieve a far higher degree of efficiency, access to information control and analytics than has been possible in the past. In addition, the rationalisation of ERP platforms and its integration with treasury is resulting in enhanced visibility over information relating to cash flows, forecasts, budgets and exposures both regionally and globally. As companies expand into new markets, their panel of cash management banks may also need to expand, and we are seeing a growing interest in managing bank connectivity to handle high volumes of transactions in a robust, secure and standardised way. The desire to do this with ‘open standards’ is accelerating the adoption of SWIFT for Corporates, as well as an increase in host-to-host communication using standardised connection within ERP systems.
Maintaining access to liquidity is a priority for companies as their business expands, but this becomes more challenging in more restricted environments. In recognising that it is often more helpful to maintain liquidity at a regional level to support the treasurer’s increased focus on managing counterparty risk, companies are moving away from having a single global liquidity bank. Instead, they are seeking regional liquidity partners, who have considerable depth of presence across markets within the region, and have the technology, expertise and creativity to develop creative liquidity solutions in challenging environments.[[[PAGE]]]
As banking regulations evolve, such as the introduction of Basel III, a more symbiotic relationship is emerging between corporates and banks. Both parties are keen to build deeper relationships that include financing – both long-term debt as well as short-term supply chain finance - and ancillary activities such as cash and liquidity services. Consequently, this wider relationship is one of the important factors in treasurers’ choice of banking partners.
Connectivity is also a priority, as we discussed earlier. Not only are treasurers seeking support for SWIFT corporate access from their banks but ERP integration through host-to-host connectivity is becoming increasingly important for many companies. Related to this, client access systems need to be functional, robust and secure, and easily integrated with the treasury management systems used by regional or global treasury centres. This involves not only the technical integration capabilities, but support for open standards such as ISO 20022 — the format used for SEPA payments in Europe which is fast becoming a global standard.
Related to this, treasurers are also seeking rich functionality through banks’ client access systems. Not only do they need to exchange transaction and statement information with their bank, but they are also demanding more sophisticated analytics on cash flow trends, forecasting accuracy etc. In some cases, these capabilities are provided through the treasury management system or ERP, but the lines between these systems are blurring as integration becomes seamless, and in many cases it makes sense for the bank to be providing analytic tools. This is just one manifestation of the growing advisory role that banks such as Standard Chartered are taking, leveraging the depth of expertise that we have developed in each market, and our experience in optimising customers’ regional cash and liquidity management activities.
Treasurers’ need for richer information and better analytics of data such as payables and receivables illustrates the way in which the role of corporate treasury is changing. No longer are treasurers simply dealing with the financial impact of these flows, but they are working with sales and procurement to influence the timing, processes and methods for payments/ collections far more than in the past. By doing so, they are in a position to optimise the working capital cycle and reduce the investment required in working capital. This is more challenging in the emerging markets of Asia, the Middle East and Africa as supply chains are often more complex, but technology provided by banks such as Standard Chartered is helping to provide greater supply chain transparency.
Related to this, we are seeing a growing number of companies seeking to increase the resilience of their supply chain whilst enhancing their working capital position by introducing, or expanding the scope of, supply chain finance programmes. Standard Chartered is a key provider of these programmes, not least due to our depth of presence in each market, and relationships throughout the supply chain, from SMEs and mid-cap companies to the largest multinationals, so we act as an end-to-end supply chain enabler. As a result, we have a unique ability to evaluate supply chain risk effectively across the various links, and potentially take on greater channel risk than some international banks that work with siloed sub-sections of the supply chain.
While there are often significant differences in the maturity and automation of payments infrastructure that exists in some emerging markets, we are also seeing some rapid developments. For example, in China, CNAPS already provides both efficient real-time gross and net settlement of high value and urgent payments (HVPS) and batch processing (BEPS) with a second generation of CNAPS (CIPS) due to be launched in 2014 which will be more consistent with international formats.
In India too, the use of cash and manual instruments such as cheques is rapidly declining in favour of electronic payments. While in parts of Africa, clearing infrastructure remains at an earlier stage of development than other regions, governments and central banks, encouraged by banks and larger corporate customers, particularly multinationals, recognise the value of efficient clearing mechanisms. As multinational corporations expand their investment into these markets, this will continue to stimulate investment in clearing infrastructure.
The challenge for corporate treasurers is to keep abreast of developments and take advantage of them, and to ensure that their suppliers are doing the same. Again, this is one of the areas that emphasises the value of working with an expert regional bank such as Standard Chartered, with a depth of presence in each market, and broad customer base.[[[PAGE]]]
Liquidity management remains a considerable challenge for companies operating in China, but the regulatory environment is evolving rapidly, with new opportunities for cash pooling and intercompany funding. This has traditionally been achieved using entrustment loans although there have been some developments in recent years to make this process easier. In November 2012, however, PBOC announced a pilot scheme to enable both Chinese and foreign multinational corporations to use surplus RMB in China to fund RMB-denominated activities overseas, in response to many treasurers’ pressing concerns on how to deal with large cash surpluses in China. Standard Chartered China was the first foreign bank to be granted approval for an RMB-denominated loan quota on behalf of a multinational customer as part of this pilot programme. There is already considerable interest in this programme: in particular, the potential it offers to transform intercompany lending in RMB, and the ability to use RMB to offset short-term debt and working capital deficits in other markets through multi-currency cash pools in Hong Kong. A foreign currency loan programme is also in a pilot phase which is also important, although the impact is more restricted to particular industries that are denominated in USD or another foreign currency.
Developments in both RMB and foreign currency lending are highly significant and are providing greater confidence to corporations when determining their level of investment in China, and we expect to see further developments emerging. The challenge for corporate treasurers is whether to take ‘early mover’ advantage of new opportunities as they arise, or to wait for further developments that may result in greater simplicity. Working with a bank such as Standard Chartered that is at the forefront of initiatives to create a more competitive landscape in China can be very helpful in determining when best to adapt processes and structures in response to new developments.
Absolutely, it will be highly significant if CIPS becomes the international clearing system for RMB. If both foreign and domestic banks are able to participate, CIPS will accelerate the development of RMB as an international trade currency. While there are still questions over the structure of CIPS and the legal framework under which it will operate, it has already been determined that the new system will be based on XML ISO 20022 formats and will support both Chinese and non-Chinese character sets.
Standard Chartered will continue to observe developments closely and to participate in these initiatives as appropriate. We are already the largest RMB trading bank outside China with a leadership position within China. China is just one of the countries in which we have developed significant depth of presence, with a commitment to excellence in solutions, analytics and advisory services across the working capital cycle, supported with close proximity to our customers.
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