Liquidity Management in Asia-Pacific: Change and Opportunity
One of the most fascinating aspects of liquidity management in Asia-Pacific today is its dynamic nature. Apart from regulatory change within the region, numerous other factors – such as shifts in US tax legislation and interest rates – also have a bearing. As Harish Kumar, Regional Head of Liquidity and Investment Products, Global Liquidity and Cash Management, Asia Pacific at HSBC explains, these all present corporate treasurers with an interesting range of opportunities.
Regulatory change in Asia-Pacific is now a fact of life for corporate treasuries, but given the right information and support, it is definitely not an insuperable problem. However, a critical point here is clarity. This is because regulation in the region has of late been changing frequently and often also leaving some scope for interpretation, such as whether a corporate might be deemed to fall in one or another category under a particular set of rules. A further complication is that regulation in some countries can be issued at both a provincial and national level, so ensuring compliance with both sets of rules presents additional challenges, whether or not the bank account is resident or non-resident is largely immaterial and the movement of funds is straightforward. This may no longer be the case post-Brexit. The tax implications for a particular liquidity structure, or the consequences of an entity moving funds to another entity, or to the same entity in another jurisdiction, remain unknown.
Regulatory clarity and certainty
The need for treasuries to seek regulatory clarity and certainty in Asia-Pacific is underlined by the ‘outline’ nature of some new regulation. For instance, regulations may be introduced that tighten or relax certain existing rules relating to cross-border inflows or outflows of corporate liquidity. However, the new regulations might not explicitly state the extent to which the new conditions will apply.
This is the sort of situation where the capabilities of a corporate’s bank can make a considerable difference. Some banks have a long and close relationship with local regulators through their compliance departments. This can be invaluable in obtaining clarification from the regulator on exactly how the regulation applies in practice. As mentioned above, in some countries (and China is a case in point) separate regulations may be issued at provincial and national levels. Therefore, the corporate’s bank needs to have good regulatory relations at both levels and be able to aggregate any discussions to a holistic picture.
The overriding overall point here is certainty: treasurers need to be confident that their bank has been diligent in developing the most accurate interpretation of the regulation based on its dialogue with regulators at all the necessary levels. If it has, and gives clients a single consistent version of this interpretation, then they can make strategic decisions with certainty and comfort.
In-country flexibility
Once corporates have clarity on the interpretation of current regulation, they can respond by making appropriate adjustments to their liquidity strategy. Nevertheless, the frequency with which regulation in Asia-Pacific can change means that treasuries need to be sufficiently flexible to respond effectively – and have banking partners with the right capabilities to assist them in doing so.
For example, a country might introduce regulation on cross- border outflows with the intention of preventing onshore incorporated companies from becoming net lenders. The regulation might therefore limit remittances offshore to the extent of repaying existing offshore borrowing, but not beyond.
This could result in an accumulation of onshore liquidity upon which yield would need to be maximised, while also remaining within the counterparty risk constraints of treasury investment policy. For some corporates, situations such as this would place an onus on their large international banking partners to deliver a suite of investment solutions that spanned the tenor spectrum.
Some banks have already responded to this type of challenge by launching new onshore products to give further depth to their existing liquidity product range. For example, HSBC has launched certificates of deposit of multiple tenors in China – the first foreign bank to do so. At the same time, anything partner banks can do to support more flexible and agile liquidity management adds value from a corporate treasury perspective. One example would be tools, such as HSBC’s Liquidity Investment Solutions, that facilitate automated investment and divestment across multiple investment options and providers from a single linked header account.
Pan-regional flexibility
The regulatory changes that have driven the onshore accumulation of liquidity in China since the end of 2016 have been gradually and partially relaxed. This again underlines the need for flexibility in the design and deployment of liquidity structures, both in China and across Asia-Pacific more generally.
A concept that could prove invaluable in this respect is the next generation virtual account [1] (ngVA). Historically, virtual accounts have been used to improve the auto-reconciliation of accounts receivable by giving each customer an individual virtual bank account number to which they send their remittances.
However, ngVAs add a self-service component to this, thereby making it easy for treasuries to open/close virtual accounts as needed. This can be an invaluable tool for treasuries seeking greater strategic flexibility in their liquidity management, as ngVAs can be used to consolidate liquidity regionally in multiple currencies to the single physical account at the top of each group of virtual accounts. Then, as circumstances change, individual virtual accounts can also be opened/closed for entities as required. ngVAs also facilitate more sophisticated centralised payment mechanisms, such as Payments On Behalf Of.
Positive regulation
It is easy to fall into the trap of seeing regulation in Asia-Pacific in the negative light of protectionism, but the reality is actually very different. Possibly as a continuing consequence of the 1997 Asian financial crisis, most countries in the region are understandably keen to limit speculative flows (‘hot money’).
By contrast, they are typically strongly supportive of legitimate trade and the associated financial flows. Some countries are also embracing the fact that they have global corporates in their markets and appreciate that these corporates may have a need to repatriate cash.
This has recently been reflected in various relaxations and/ or increases in permissible transaction limits in the region. For instance, in the latter part of 2017 South Korea almost doubled its limit on permitted outward lending to USD50 million.
In addition, a range of countries in Asia-Pacific - including Malaysia, Hong Kong, Singapore and Thailand - are offering incentives (not just tax breaks) to encourage corporates to move operations such as treasury centres to their jurisdictions.
Notes
1 HSBC intends to launch next generation virtual accounts in Asia
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US interest rate rises and tax changes
The increasingly business friendly attitude of some Asia-Pacific countries in the context of liquidity management is particularly timely for US corporations in view of recent and ongoing US interest rate rises. Previously, low borrowing costs and similarly low on balance sheet bank deposit rates meant that many US corporates could take a fairly passive approach to liquidity management. However, now that US rates have started to rise, borrowing costs have also risen and money market funds have become increasingly active in offering enhanced returns. At the same time, changes to US tax legislation have introduced a one-off tax break for the repatriation of corporate cash at a rate of 15.5 per cent (for cash holdings, 8 per cent for less liquid holdings), rather than the usual 35 per cent [2].
This combination is motivating the treasuries of US multinationals to take a more proactive approach to repatriating surplus cash from overseas operations in regions such as Asia- Pacific to pay down external debt. In addition, they are looking for more efficient ways of investing any remaining surplus cash – with automation of this process a growing priority.
An important capability for any tool for automating liquidity investment is that it needs to cover multiple providers of liquidity products (both on and off balance sheet) and provide an automated link with a bank account to which the treasury moves its surplus liquidity. A tool that can provide this – such as HSBC’s Liquidity Management Portal – will significantly decrease the corporate treasury’s liquidity management workload, especially if both automatic investment and divestment (based upon cash trigger levels in the bank account) are available.
Liquidity consolidation
The availability of this sort of tool also links with another accelerating trend in liquidity management: the drive to consolidate balances and banking relationships. A growing number of treasuries are increasingly aware that in a rising interest rate environment fragmentation reduces their leverage in relation to both their credit and debit positions. If they consolidate those positions and relationships, the situation improves - especially if the bank to which they consolidate can offer sophisticated automated liquidity management tools.
This consolidation has an additional benefit in the context of Asia-Pacific jurisdictions where currency controls or other restrictions constrain the movement of funds for liquidity management. Under these circumstances, a global bank such as HSBC can offer an interest enhancement facility whereby balances in restricted jurisdictions can still be taken into account at a global level when calculating overall credit interest compensation and/or offsetting against debit interest.
Conclusion: managing transition
In the context of liquidity management, Asia-Pacific has historically been seen as challenging, with much of this perception relating to the concept of ‘trapped cash’. While this still applies in some jurisdictions and circumstances, the overall situation is gradually improving, with several countries adopting a more relaxed stance, especially in the context of business- related flows.
While this is good news, it doesn’t actually make Asia-Pacific any less challenging, but just changes the nature of the challenge to one of managing liquidity in a continually shifting regulatory and interest rate environment. Staying on top of this situation is considerably easier if one can count on the support of a global banking partner that can offer the necessary regulatory intelligence, network, products and tools to facilitate a flexible and responsive liquidity management strategy.
