As China steps up its currency liberalisation programme, corporates are having an easier time managing their cash across Asia as a whole. But staying abreast of the changing regulatory regimes in different jurisdictions continues to be a challenge.

Treasurers have to be very versatile and keep track of what is happening in the region as well as all the global macro events – a renaissance treasurer of sorts – Lisa Robins 

 

 

A few years ago, asking a treasurer what their biggest Asian cash management problem was got an immediate response: "trapped cash" – and by that they meant China. The problem became more acute as companies expanded their business in the country, according it a bigger proportion of their global operations.

Not only was it nigh-on impossible to repatriate money from China to fund overseas entities, but companies could not improve efficiencies in their liquidity management structures because China was excluded from global cash pools.

Renminbi internationalisation

In the past 18 months, however, the Chinese authorities have accelerated the pace of reform, relaxing restrictions on cross-border currency flows as part of its drive to internationalise the renminbi.

It is now possible for multinational corporations to perform cross-border cash pooling, two-way renminbi sweeping and inter-company loans on a nationwide basis, i.e. outside the Shanghai Free Trade Zone (SFTZ), although certain conditions remain in place. Larger multinationals can move funds daily between their onshore and offshore entities without needing approval from the People’s Bank of China and the State Administration of Foreign Exchange.

“As China relaxes its foreign exchange controls and regulations, which allows for freer mobility of Chinese currency between onshore and offshore, it becomes much easier to integrate China cash and treasury management into the rest of the global treasury operations,” says Mark Troutman, recently promoted to global head of corporate sales, payments and cash management at HSBC.

For example, earlier this year HSBC helped Würth Group, a global fastening products company, set up a fully automated two-way renminbi sweeping solution between China and Germany. The group is now able to manage the liquidity of its Chinese group companies centrally from Germany and integrate it into its global cash management structure.

Making the right choice

While all companies appreciate the significance of China’s currency liberalisation agenda and its impact across the region, a number are not rushing to change their treasury configurations just yet. For example, two US-based multinational corporations (MNCs) say they are content to leave their cash in China.

The multinational technology company is cash-rich in China but does not include the country in its regional cash pool. There are several reasons for this, explains the regional treasury manager. “First, our goal is to achieve greater interest income from our cash. Currently China offers the highest interest rates among the global markets, which is why we leave our cash there," she says.

“Second, China is one of our biggest markets for business development, so we are setting up new entities and investing in China. Therefore we don’t want to borrow from overseas but make the best use of the cash earned by China in China.”

Likewise, Honnus Cheung, CFO of Travelzoo Asia-Pacific, a global internet media company, also keeps cash in China to tap the higher interest rate while taking advantage of the lower lending rate in Hong Kong. “In this way I am able to earn a little interest from the spread,” she says.

Ms Cheung will use intercompany loans if she needs to move cash out of China. “This must be done via a bank, which will arrange the paperwork and logistics, but it is possible. So if the Hong Kong entity needs cash, then I can simply arrange an intercompany loan,” she explains.

Damian Glendinning, on the other hand, organises his company’s treasury activities to avoid inter-company loans. The treasurer at Lenovo, a Chinese multinational computer technology company, explains: “Because of the way we structure things in Asia, we tend not to do inter-company loans – group entities are mostly funded through the inter-company goods account. This makes life much easier from a regulatory point of view as inter-company loans are very challenging in many Asian countries.”

The regulatory patchwork

Mr Glendinning hits upon a very real challenge for Asian treasurers operating on a regional basis – the various rules in each jurisdiction.

“Any company operating outside of its indigenous market has to deal with a number of heterogeneous markets with different regulations regarding repatriation of cash. The fact that each country has different regulations, even if they are loosening up, adds complexity to companies operating pan-regionally in Asia,” says Lisa Robins, managing director and head of global transaction banking for Asia-Pacific at Deutsche Bank.

Karin Flinspach, head of cash products, transaction banking, at Standard Chartered, adds: “When comparing the Asia-Pacific region with the Europe, Middle East and Africa region, there are a smaller number of countries but it is a far more complex region to manage. There are numerous regulatory regimes and while there are moves to integrate more, it is still a very decentralised environment.”

Notwithstanding the disparate regulatory regimes, the trade and cash flows between Asia countries are extensive. “What happens in one country has an impact on another,” says Ms Robins. “Treasurers working in the region, whether domestic or international, have to stay abreast not only of what is happening in the country where they are based but also in jurisdictions across the entire region, because what happens in China, Thailand or India could have a major impact on Indonesia, for example. Therefore they have to be very versatile and keep track of what is happening in the region as well as all the global macro events – a renaissance treasurer of sorts.”

And while countries such as Malaysia and Thailand are following China down the road of greater market liberalisation, it is not a one-way street when it comes to countries amending cross-border currency regulations, warns Mr Troutman. For example, as of July 1, Indonesia’s central bank banned the use of foreign currencies for domestic transactions in order to control onshore demand for dollars and ease downward pressure on the Indonesian rupiah. This did not stop the rupiah from plunging in September to its lowest level since the height of the Asian financial crisis in July 1998.

Vaibhav Natu, treasury director for Asia responsible for cash management and investments at Intel, has first-hand experience of India’s tightly controlled environment but believes the country is making progress in terms of simplifying regulatory requirements. However, he questions whether countries will continue to allow greater free flowing of currencies, especially in the context of increased foreign exchange volatility.

“With currency collapses happening around the world, every country is being more careful than ever before,” says Mr Natu. “Moreover, regulatory concerns such as money laundering and tax avoidance have taken precedence for regulators. So although scrutiny has reduced in some areas, it has increased in others.”

Cash visibility and forecasting

In addition to regulatory constraints making managing liquidity in Asia-Pacific a complex affair, corporate treasurers are still struggling to obtain an accurate snapshot of their cash positions in a timely manner.

Cash visibility was the most commonly cited concern in the 2015 Asia-Pacific Treasury Management Barometer Survey commissioned by Bank of America Merrill Lynch and SunGard. The report said: “Achieving cash visibility is an essential first step in optimising working capital and forecasting cash flow, as well as implementing liquidity solutions such as cash pooling.”

Mr Glendinning, who is also president of the Association of Corporate Treasurers Singapore, reports that two issues – cash visibility and cash flow forecasting – topped the agenda of the association’s second annual forum held in September.

Lenovo solves the visibility issue by keeping all of its bank accounts with one bank. “The fact that we felt that was a good approach tells you that there is a problem with how the thing works generally,” says Mr Glendinning. “While gaining better visibility over cash flows is now possible, it is still much harder than it should be.”

Similarly, Travelzoo’s operational cash is centralised in one bank from a regional cash management perspective – HSBC. In addition it uses the Bank of Tokyo-Mitsubishi UFJ in Japan and therefore needs to convert daily balance reports via MT940 (Swift message). “While I can’t call it a cash forecasting system, I can view the cash available on a timely basis, which is important for us in making the cash management decision,” says Ms Cheung. Another portion of Travelzoo’s main cash is located in the company’s online payments solution platform, which she can also view in near-real time.

Delayed response

In comparison, the other US MNC deals with hundreds of banks, which send Swift messages with daily transactions and balances to a third party. The third-party processor then feeds the data into the company’s treasury management system to give treasury daily oversight of its cash. “We can see more than 95% of the total global cash but with a one-day delay because we receive the data the next working day,” says the treasury manager.

Cash flow forecasting is a challenge for the MNC because it is a large organisation with different functions: one team is responsible for cash collections while many teams handle payments. Although the teams coordinate to gather data, the process is still very manual.

Achieving an accurate cash flow forecast is the ‘Holy Grail’ for most companies, according to Mr Troutman, and it takes a lot of work to achieve. “It is not just about technology, although that can be an enabler; it's more about work practices and even the culture of the company, in terms of understanding the timing of material cash flows,” he says. “A company needs to be diligent across both the finance and non-finance business units.”

Mr Natu agrees, saying: “Forecasting cash is primarily a function of getting the processes right, as well as operating in an environment that has more predictable cash flows. If your underlying business is volatile, then that will impact your forecast.”

Centralising treasury 

Regional treasury centres (RTCs), which centralise treasury functions including cash management, payments, bank account management and finance, have played an important role in improving both visibility and cash flow forecasting, according to Ms Flinspach.

And in many ways the advent of RTCs is also fuelling the move towards greater liberalisation across the region, as jurisdictions striving to be the next global financial hub vie for corporates to come and set up an RTC in their country.

“My personal view is that this is a good thing because it says that corporate treasury is becoming a more important part of the economy,” says Mr Glendinning. “In the past, most countries were relatively anxious to clamp down on cross-border trade, cash pooling, etc, so the fact that they are now competing to attract such activity shows a significant shift in attitudes.”

Singapore and Hong Kong are both long-established locations for RTCs, but Shanghai is also gaining ground. In the 2015 Asia-Pacific Treasury Management Barometer Survey, among respondents with RTCs, one-third chose Singapore as a location and 30% Hong Kong, reflecting the maturity of the financial markets, the liberal regulatory environment, a skilled, specialist workforce and connections to other Asia-Pacific countries. China, particularly Shanghai, is growing rapidly as an RTC location (25%).

Treasurers chose an RTC location based on their operational priorities. The US MNC, for example, has one treasury team in Asia spread between Shanghai and Singapore. The Asia-Pacific treasury director in Singapore oversees the regional cash pool and most of the regional banking relationship management. “The convenience of having the presence in Shanghai is that other business functions are also based there,” says the regional treasury manager.

Intel’s offshore treasury operations consist of money movement and hedging – effectively the capital markets – and regulatory work. The company decided to consolidate regulatory work in those countries where it has a large presence. “The capital markets work of investing and lending money, cash management, bank account management, back-office operating processes, etc, is consolidated in the RTC in India,” says Mr Natu, “because it can be done from anywhere.”

A moveable feast

Both Mr Glendinning and Mr Troutman agree that it is possible to perform treasury tasks from almost anywhere, as most transactions are done electronically.

For example, Lenovo runs its cash management and bank accounts for European countries out of Singapore. “We use a computer terminal and internet banking, so I could be sitting in Singapore, India or anywhere else,” says Mr Glendinning. “We perform much of our foreign exchange trading over an internet portal; even though the trades are done in Singapore or Hong Kong, it doesn’t matter where the person is.”

Mr Troutman says that today a growing number of companies run components of treasury from other places – effectively a virtual global treasury team. “One person in Singapore may be globally responsible for one treasury function such as cash management, while another in the same team but based in Europe will be responsible for FX and risk," he says. "Some companies may keep a regional front-office treasury in Singapore but host treasury operations in a shared-service centre environment in India or Malaysia.”

He adds: “Because technology has made it easier, companies are exploring how to move beyond a set of regional treasuries and a global treasury to one that is more fluid or virtual and organised by function instead of putting everything in one place.”

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