China cash management debate: The challenges of Chinese cash management

Chris Wright, Euromoney The whole world is fascinated by the China story: by the pace of expansion of Chinese businesses, domestically and in many cases internationally. So let me start by asking the corporates what their experience has been, and the impact on their cash management functions.

YHC, CHEC China Harbour Engineering is a wholly funded subsidiary of China Communications Construction Company. We are responsible for its overseas businesses and operate in more than 35 countries. We are focused on infrastructure development, including harbour construction, roads, bridges, power plants and some large water conservancy infrastructure projects. We started from project contracting and expanded into EPC (engineering, procurement and contracting). Now we are expanding into financing plus EPC. We are providing integrated services, involving BOT [build operate transfer], BT [build transfer] and PPP [public-private partnerships]. As for cash management, we have experienced great demand for cash management services. We have a partnership with HSBC for our overseas offices and our subsidiaries outside China, with vertical management of financial matters.

PMF, CPF The State Grid Financial Corporation was established in 1993 as State Grid Trust Company, then reincorporated into the financial corporation in 2003. We have five major regional companies, with 24 branches, and with centralized cash management operations and settlement. Our journey in recent years has been to centralize the cash management functions of these regional companies into one. The regional branches had different methods of settlement, so from 2007 we started to standardize their practices, before integrating all of their processes and settlement methods in 2009. We also centralized management of human and financial resources, as well as integrating and centralizing cash management flows.

We follow the characteristics of the State Grid. The first characteristic is that it has a large coverage of electricity supply, serving 24 provinces, municipalities and autonomous regions, and a very large population. We worked with a lot of big commercial banks in China, such as ABC, Bank of China, CCB and ICBC, to develop cash management products around a multi-polar model. Through these four banks, we enjoy customized cash management products and can do the following things: we can realize trans-regional cash management; we can integrate cash from the domestic banks into the State Grid financial company, vertically and horizontally (by which we mean we have a cash pool and different regions can integrate their cash into it); and since 2009, we can realize uniform settlement. We do that through the corporate banking account and through internal transfer functions.

Now, many different banks can be integrated into the system, with internal transfer and settlement across several thousand units. The cash management for our company has developed by leaps and bounds.

However, with greater power, we have greater responsibility, and we face several challenges, especially since under the 12th five-year-plan we have to go global. As well as providing quality service to our citizens, we have to provide international services. Currently we are transmitting power to the Philippines on a 25-year project, and we are considering several projects in Japan. At the beginning of this year our company established eight agencies or representative offices to look at cooperative projects in order to implement the global strategy. So cash management now poses new challenges: how can we manage and support overseas projects with financing and cash management monitoring? We are doing research on that.

Euromoney Let’s turn to the banks. We are hearing stories of domestic and international expansion, of increasing sophistication, and of challenges in integration. From the banks’ perspective, how is your business developing in serving clients like these?

LH, Bank of China Our clients fall mainly into three categories. One is clients that need to go global, such as Sinopec; we need to work out how to serve them better, to strengthen their financial management and control. We have more than 1,000 outlets overseas and 1,000 agency banks, so we will work with them to establish a working mechanism, making use of their local settlement system services. We think the focus area should be Africa and Eastern Europe, as these are the places more Chinese companies would like to go global to; in the current situation domestic companies do not have that much business going on in the US and the EU.

The second group is customers who want to make their way into the Chinese market. According to Mofcom [the commerce ministry], utilized foreign investment was $60.89 billion from January to June 2011, an increase of 18.4% on the previous year. We see a rich source of customers and we can serve them through our more than 10,000 outlets, our advanced IT system and by working closely with agency banks in relevant countries, so when customers come to China with their business we can serve them better.

A third area is domestic clients who need advanced cash management. The 12th five-year plan encourages the upgrading of businesses, especially in steel, non-ferrous metal and coal development. The State Council has encouraged M&A in these sectors in order to make the industry more concentrated. Progress in this area is obvious, such as the Shougang steel company buying smaller local companies. During this process, group companies will have large needs for the operation, integration and monitoring of the branch companies. For example, in the coal sector, smaller mines have to be integrated, while bigger mines are established with capacities of billions of tones. In this process, how do you regulate their cash management and operations? They need products from the banks to support them. We see great business potential here.