Published: August 01, 2013
There can be few multinational corporations today for which developing their business in China is not a major priority. Many have now reached a ‘tipping point’ where their business in emerging markets, (a term which somewhat inexplicably still includes China) now represents 50% or more of their business, with China typically the largest growth market. While there may be talk of a slowdown in growth rates in China, growth remains far stronger than many other regions, and its market potential in the longer term is undiminished. From a treasurer’s perspective, few countries create the same challenges as China, not least due to the complexities of a highly regulated market and the number of regulatory announcements, coupled with rapid growth in China that many companies have experienced. This article explores some of the recent regulatory reforms from People’s Bank of China (PBoC) and State Administration of Foreign Exchange (SAFE) and suggests some of the cash and treasury management opportunities that these reforms present. As Kee Joo Wong, HSBC summarises,
“The past one or two years reflect a historic period of financial reform. Most recently, we have seen opportunities emerge for foreign currency cross-border pooling, netting, centralised payment pilots and RMB cross-border lending and trade settlement regulatory simplification schemes being rolled out across China.”
Regulators in China continue to take a measured approach to liberalisation, with the concept of pilot programmes as a mechanism to introduce regulatory reforms now well-established. PBoC and SAFE work with a limited number of banks and their customers to test regulatory reforms and assess the impact before expanding the remit of these programmes more widely. Kee Joo Wong, HSBC explains,
“PBOC and SAFE use pilot projects as a means of testing, reviewing and refining liberalisation initiatives in a controlled way. Initially, a limited number of banks and their customers are involved, sometimes starting in a few cities in China e.g., Shanghai and in some cases Beijing. Once the pilot project has been deemed a success, it can then be rolled out more widely, incorporating modifications where necessary.”
The reason for introducing reforms on a limited basis is clear: to assess and contain any potential negative impact and ensure that reforms are rolled out smoothly, with any amendments made at an early stage. It is perhaps more frustrating for companies that are not included in pilot programmes in that they often have to wait many months before new opportunities are available to them. Kee Joo Wong, HSBC, urges treasurers to be proactive in working with their banks to identify the pilot programmes that meet their business needs and seek inclusion,
“For a foreign multinational operating in China, becoming a pilot customer can be very beneficial. Not only does a company have the opportunity to input directly to new regulatory initiatives, but it often prompts a review of cash and FX processes in order to become more efficient.”
The second point that Kee Joo raises above is particularly important: i.e., that involvement in a pilot programme should prompt a review of cash and treasury processes. He continues,
“In reality, all companies operating in China should be reviewing cash and treasury processes regularly, both to determine how they can leverage new opportunities that are opening up, and to review their operations that may have expanded significantly. In many cases, treasurers and finance managers in China are seeking to implement best practices and technology from other regions to achieve greater consistency and standardisation, even though there may be some ‘tweaks’ to meet local requirements in China. This brings advantages to local operations but also provides greater visibility of cash and risk, and improved predictability over processes such as netting cycles, which in turn assists with cash flow forecasting and funding decisions.”
Changes in scale and scope to a company’s activities in China and evolving regulations that could result in greater operational and financial efficiency should prompt treasurers to review their cash and treasury management policies and processes. Bearing in mind that China remains a highly regulated market, it may seem unrealistic to implement the same approach to cash and treasury management in China as in other regions. According to Kee Joo, the barriers are being lowered, however,
“Treasurers should not be concerned about experimenting with techniques and solutions they have used in other regions in China. Regulations are becoming increasingly progressive, and there is greater flexibility today than in the past, particularly when participating in a pilot programme. While it may not be possible to implement a solution in exactly the same way as in other regions, it is likely that efficiencies can still be achieved.” [[[PAGE]]]
One of the best known of recent treasury-related reforms in China is the RMB cross-border trade settlement scheme which allows trade transactions to be settled in RMB. Since August 2012, all cross-border transactions in goods and services have been eligible for the scheme. This has been one factor in the leap in the volume and value of cross-border transactions settled in RMB: between January – June 2013, RMB 2.05tr was settled in RMB, compared with RMB 2.94tr for the whole of 2012, and RMB 2.08tr in 2011 (source: PBoC).
According to a recent HSBC survey (July 2013), half of all international companies in Hong Kong (50%) and almost a third in mainland China (30%) are now using RMB to conduct cross-border business. The survey also found that 53% of Chinese businesses surveyed would offer discounts of up to 5% for transactions settled in RMB, illustrating a clear benefit of settling trade in RMB.
With an increasingly active offshore RMB (CNH) market in Hong Kong, London and Singapore, receiving RMB from Chinese customers does not pose particular problems for treasurers, particularly if they also have Chinese suppliers. However, use of RMB for cross-border trade remains far less common for companies outside Hong Kong, with 11% of businesses surveyed in Singapore, 11% in the UK, 9% in Germany, 9% in the US and 7% in Australia currently using RMB. The primary reasons for lower adoption were: lack of knowledge about RMB cross-border trade settlement and its benefits (52%); and complexity of processes (51%), a point that has not gone unheeded by PBoC. With a great deal of media coverage of RMB cross-border trade over recent years, and regular communications from banks, it is difficult to see why treasurers remain unfamiliar with the opportunities. One explanation is that companies continue to think of cash and treasury management in China as being ‘too difficult’ and focus on other regions where the potential for treasury enhancement is more obvious. In reality, however, the benefits may be even greater by optimising processes and financial efficiency in China to support a proactive growth strategy more effectively.
Despite the lack of awareness, or perhaps motivation, in some countries, the RMB cross-border settlement scheme is successfully allowing Chinese companies to reduce their foreign currency risk, and foreign multinationals to centralise their RMB risk offshore and access a wider base of Chinese suppliers and customers, administrative challenges have prevailed until recently. The level of documentation that used to be required for each transaction meant that cross-border transactions remained cumbersome and manual for both Chinese and foreign companies, with little opportunity to centralise or automate processes on either side of a transaction. For example, a company receiving RMB had to present all supporting documentation for verification physically before funds could be released. Furthermore, specific documentation requirements varied between provinces and banks, making it difficult to standardise as well as centralise processes.
PBoC recognised that the financial and competitive benefits of RMB cross-border trade settlement needed to be supplemented with the opportunity for greater operational efficiency. Therefore, to encourage companies to establish treasury centres and shared service centres (SSCs) in China, and promote Shanghai and Beijing as financial centres, PBoC has simplified and streamlined processes for cross-border trade in RMB. Effectively, a cross-border RMB description form should now serve as the payment/receipt instruction to permit a transaction to proceed and enable funds to be released. The scheme was first introduced in Shanghai and Guangdong but it has rapidly expanded to further provinces and cities in China. Consequently, all companies except a few under regulatory supervision are now eligible, and the scheme covers all goods and most services.
As Yigen Pei, Citi discusses, simplified cross-border trade settlement brings considerable opportunities,
“It is often difficult to establish shared service centres in China, as physical documentation still needs to be presented for cross-border transactions. This requirement was relaxed in August 2012, so that companies can now use their electronic banking systems to make cross-border payments, but there remains some documentation that needs to be completed. With the latest PBoC announcement on cross-border RMB business, operating efficiency and centralised processing can now be applied to RMB cross-border payments.”
Cross-border trade in foreign currency has also been simplified, which again enables companies located in China to centralise and increase automation in their cross-border transactions. While three documents used to be required to make a foreign currency payment (contract, invoice, customs documentation) only one document is now required. Collections in foreign currency no longer need to be inspected online, and the process for banks to validate transactions is easier, ensuring earlier value date of payments and better forecasting.
Mike Nelson, J.P. Morgan emphasises the benefits of these initiatives,
“Settlement of cross-border trade payments is now more flexible for both RMB and foreign currency amounts. Foreign currency payments can now be centralised more easily, and netting is also now permitted under the pilot subject to regulatory approval, representing a major breakthrough for many companies. Similarly, we are seeing moves towards simplified RMB cross-border trade settlement, which is already available for RMB cross-border loans.”
In addition to simplified processes for RMB and foreign currency trade settlement, companies are now able to purchase foreign currency before the trade settlement date, making it easier to manage liquidity and reduce the number and frequency of FX transactions. Yigen Pei, Head of Treasury and Trade Solutions, Citi China continues,
“Foreign currency account opening is also more straightforward, as companies can open accounts in cities other than that in which it is registered, enabling them to operate more flexibly and centralise cash.”
A related initiative is the ability to perform netting, including netting payables and receivables, formerly not permitted in China. Kee Joo Wong, HSBC outlines,
“The ability to net payables and receivables brings substantial benefits, and resolves the funding gap resulting from timing differences, minimises FX positions and reduces the number and cost of transactions. HSBC is the only foreign bank performing high volume cross-border netting at present.”
Over the past 12 months, regulators in China have focused not only on trade and FX flows, but also on capital flows. Recent regulatory developments now mean that the prospect of managing liquidity, both within and beyond China, in a way consistent with other regions is becoming feasible. Historically, there have only been two ways of repatriating cash from China: intercompany trade (either in RMB or foreign currency) or dividends. During 2012, major changes were announced for both RMB and foreign currency cross-border lending, including the ability to include foreign currency balances held in China as part of cross-border cash pools. [[[PAGE]]]
Since September 2012, foreign currency balances have been able to be included in cross-border cash pools, subject to a lending quota, as part of a pilot programme. Two months later, regulations were introduced to permit foreign currency cross-border lending from Chinese subsidiaries in all cities to lend to a parent company overseas. These pilot programmes are gradually being expanded, as Mike Nelson, Head of Corporate Sales, China, Treasury Services, J.P. Morgan outlines,
“In late 2012, we saw the first pilot customers involved in the foreign currency cross-border pooling programme, and a second group of 19 companies located outside Shanghai have now been approved which sends a good signal to the market.”
In October 2012, a pilot programme was launched to enable China-based entities (in all cities) to lend RMB to overseas parent companies. In July 2013, however, this programme was rolled out more widely, with dramatic implications for corporate treasuries. Cross-border lending is no longer restricted to the parent company, and transactions no longer need to be validated by PBoC: instead, banks can approve transactions according to documented guidelines. As Mike Nelson, J.P. Morgan confirms,
“On July 10, 2013, PBoC announced that banks will be able review and approve cross-border loan applications, in line with PBoC guidelines. Prior to the announcement, RMB cross-border loans had to be approved by PBoC on a case-by-case basis.”
Yigen Pei, Citi concurs,
“With the recent announcement that the RMB cross-border lending pilot scheme has been expanded, the ability to unlock liquidity in China has been substantially increased. Until July 2013, cross-border lending was approved case-by-case under the pilot programme, but banks can now perform this approval in line with PBoC guidelines, therefore allowing a far wider range of companies to benefit from this opportunity.”
He continues,
“Increasingly, these developments will mean that RMB will become a currency of choice for large multinationals, and treasurers can be more strategic in the way that they organise treasury processes.”
When taken in composite, these reforms should be a catalyst for companies of all sizes and in all industries to review their cash and treasury management processes in China, as illustrated in Table 1.
As Mike Nelson, J.P. Morgan discusses,
“Foreign corporates operating in China are responding positively to the new opportunities, which clearly affect them in different ways, depending on their business profile. For example,
Yigen Pei, Citi agrees,
“We see our customers seeking to explore emerging opportunities to enhance their day-to-day treasury operations, but clearly each company will have different priorities, such as pay-on-behalf-of, receive-on-behalf-of or netting. We see significant demand for cross-border lending, so the recent announcement is particularly timely.”
He continues,
“RMB internationalisation is not only bringing opportunities for operational and capital efficiency, but cross-border trade settlement also offers very valuable opportunities. By transacting imports and exports in RMB, and combining this with POBO, ROBO or reinvoicing, companies can centralise their FX exposure and offshore RMB positions to allow easier FX management.”
The opportunity to introduce or extend familiar cash and treasury management structures and practices into China does not only extend to the corporate community. As Kee Joo Wong, Head of Payments and Cash Management, China, HSBC suggests,
“Banks too are increasingly able to roll out their global solutions, such as global liquidity, to China, providing enhanced functionality and flexibility to corporate customers, both domestic companies and foreign multinationals.”
This means that treasurers and finance managers will increasingly be able to use the same systems and access the same solutions and services in China as they do in other regions. This brings advantages not only to China-based treasurers but head offices outside China also gain greater visibility and control over cash. Treasurers should be engaging with their bankers and directly with regulators wherever possible to understand new opportunities, and how they can benefit from them to increase cash and risk visibility and control, optimise processes and create competitive advantage.
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