Published: March 01, 2012
Despite a slowdown in China’s growth in 2011, we are still envisaging growth of about 8% in 2012, far higher than that of other, more troubled regions, such as Europe and North America. * Consequently, we anticipate that China will remain a key strategic market for our corporate clients. However, there are some important macroeconomic trends that will continue to affect our clients’ treasury, cash and trade finance requirements. For example, the growth slowdown of China’s GDP as a result of depressed overseas demand for Chinese exports is encouraging a greater focus on the development of the domestic economy. This provides opportunities for foreign exporters providing goods and services into China.
Another change is the development of the Renminbi (‘RMB’) as an international currency. As the range of trading, investment and financing options in offshore RMB (CNH) continues to increase, so are companies who are looking at the opportunities of doing business in RMB in addition to exploring options onshore. However, it is important to understand the regulatory framework which remains complex and challenging, with which experienced banks such as Deutsche Bank can assist.
Treasurers need to remain focused on how best to manage their cash, working capital and the associated risks, and ensure that they have the right banking partners to help them. We are finding that senior treasurers, both in China and overseas, are seeking our help to navigate the complexities of cash and trade in China and understand emerging opportunities, such as RMB trade settlement, financing and investment offshore.
As China moves towards becoming a manufacturing centre - and away from simply providing an assembly base, which is part of the government’s policy to move up the value chain - there are new challenges for treasurers. Treasurers need to understand their supply chain across both the buyer and supplier community, and identify their risks and opportunities. Some treasurers who have their entire treasury function located outside of China are now looking at the potential to set up shared services in China in order to manage the financial supply chain more effectively. Companies with a Chinese treasury centre, as well as treasury centres overseas, are looking at how to streamline their activities and ensure greater cohesion.
These trends are leading to a question for many foreign multinationals: should China be considered as another ‘home’ market, remain a manufacturing base or serve as location in which to buy and sell? Many companies now have their whole supply chain based in China, a trend that seems set to continue, which has a significant impact on how treasury is structured.
Foreign companies that have recently entered China or are about to do so, will have quite different needs from those with a long history and depth of presence in the country. While newer entrants are looking for entry-level solutions in cash and risk management, more established companies are seeking sophisticated solutions to streamline and simplify their Chinese operations. It is typically these companies that are most interested in the offshore RMB market, particularly since onshore borrowing costs have increased and liquidity has become more constrained. Therefore, their aim is to raise RMB funding offshore in Hong Kong and channel funds back into China through a foreign direct investment (FDI) or shareholder loan. Many of these companies are approaching Deutsche Bank for support through financing and transactional solutions that are integrated as part of an overall liquidity management strategy.[[[PAGE]]]
Large Chinese multinationals are achieving considerable international growth through both organic growth and acquisitions. As they establish their international presence, these companies are setting up subsidiaries and research & development centres worldwide, and therefore need regional treasury centres to manage their treasury activities outside China. Since the RMB is not yet fully convertible, overseas treasury centres are not currently operating as in-house banks – yet treasurers are still looking at efficient means of financing their overseas entities. Chinese banks do not currently have the international network or global solutions that these multinational companies require. As a result, they are turning to Deutsche Bank to benefit from our strong market position in Europe and beyond, our track record in euro clearing, as well as our global cash management solutions and comprehensive technology offering.
While both foreign and Chinese companies will share the same treasury objectives, such as managing liquidity and risk, their priorities may be different. For example, liquidity management in China is key for incoming companies, particularly in the current climate of tighter liquidity constraints and a squeeze on bank financing. In the past, these companies may have implemented cash pooling for their wholly-owned subsidiaries, but not joint venture companies, which they are now aiming to do. Supply chain pressures are also increasing as a result of constrained liquidity, as small and medium-sized enterprises are struggling to obtain credit through their own banks. Foreign multinationals want to increase the resilience of their supply chain by ensuring that suppliers maintain their financial viability, without necessarily having to use their own liquidity. Consequently, supply chain financing is proving valuable in leveraging the buyer’s credit rating to provide receivables financing for suppliers, without compromising the buyer’s own liquidity position.
For multinationals headquartered in China, in turn, liquidity is typically less of a challenge as these companies tend to be well-supported by local Chinese banks and have access to financing from their local banking partners. Challenges to these companies typically arise from events occurring outside of China, such as dealing with the ramifications of the Eurozone crisis. While Chinese multinationals see the potential to expand into new markets, they need to deal with a new set of counterparty and currency risks and work with major global banks such as Deutsche Bank to employ effective solutions. For example, Chinese companies doing business in Europe are looking to take their receivables risk off-balance sheet by working with export credit agencies as part of their risk management strategy, which is also part of the Deutsche Bank trade finance solutions portfolio.
There is no doubt that RMB is gradually becoming an international currency, with an expansion in the capabilities that exist, both on- and offshore. For example, since the second half of 2011, we have seen new opportunities such as RMB-denominated shareholder loans and FDI equity injections. Corporate clients are keen to remain on top of these developments. They understand the implications for their own business and recognise Deutsche Bank’s role as a thought leader and pioneer in tapping into these new initiatives. For example, we recently completed a series of ‘firsts’: the first bank to handle RMB overseas direct investments (ODI); the first to execute RMB cross-border equity investment in China, and one of the first to complete a RMB cross-border shareholder loan transaction. Developments continue to take place very rapidly, so we have a dedicated team that monitors regulatory changes and work closely with the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE), enabling us to be quick in developing and bringing to market new solutions and frameworks upon the promulgation of new regulatory developments. In recognition of Deutsche Bank’s outstanding performance in the area of RMB cross-border settlement, PBOC Shanghai honoured our Shanghai Branch with the ‘2011 Outstanding Contribution Award’ in February 2012.
There is also a great deal going on in the offshore RMB market, such as in Hong Kong and London. Deutsche Bank is active in both markets, exploring and delivering new possibilities. As opportunities develop both on- and offshore, an important consideration for companies actively using RMB is how they can harmonise their CNH (offshore RMB) and CNY (onshore RMB) activities within a cohesive strategy. Banks such as Deutsche Bank that can offer a comprehensive range of services, including securities services, cash and trade finance are becoming increasingly attractive to treasurers as they can support both day-to-day and strategic needs across the full financial value chain.
China remains one of the world’s most compelling markets, with strong growth continuing. However, it is also one of the world’s most challenging environments in which to do business. Treasurers need to think carefully about how to manage risk, ensure access to liquidity, optimise working capital and maintain visibility across their activities in a highly regulated environment and a non-convertible currency. Deutsche Bank is in a strong position to support and guide treasurers both in their decision-making and in putting policies into action.
* source: http://www.reuters.com/article/2012/01/24/us-imf-idUSTRE80N1CP20120124
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