China, India and Russia worst offenders in trapping company cash: Trapped cash pulse survey

Duncan Kerr
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Treasury professionals of companies with combined annual sales of more than $250 billion have voted China, India and Russia as the worst countries to repatriate company funds from, according to Euromoney’s ‘trapped cash’ pulse survey.

In the first of a series of pulse surveys on notable issues throughout the year, corporate treasurers and finance directors of international companies across industries voted China the "least efficient" country to repatriate company cash from, with India voted second, Russia third, Argentina fourth and Turkey fifth.

By comparison, the US, Germany and the UK were voted the "most efficient" countries in the survey, which was conducted during the past month.

The results, which reflect some of the longstanding grievances large and mid-sized companies have with doing business in emerging economies, will come as a blow to those countries with the least efficient regulatory and tax regimes.

While there has been a concerted effort by the governments of China, India, Russia and Turkey to tackle the issue of trapped cash and ease some of the cross-border liquidity-management restrictions, the survey results do underscore that more work is needed to successfully address these challenges.

" China is arguably making the most overt progress at the regulatory level around how multinationals can access their onshore cash," says Julian Oldale, head of international cash management origination, North America, at Royal Bank of Scotland (RBS).

"With the onset of new regulations in 2014, multinationals may now establish entities within the Shanghai free-trade zone (FTZ), ultimately linking their onshore cash pools with their offshore global treasury centres. This is a major move."

He adds: "However, there is still much work to be done from a technical perspective to make it a widely adapted process, as volumes must warrant the registration of these companies in the FTZ."

For Christian Edelmann, partner and head of Asia Pacific region at Oliver Wyman, the FTZ – a test-bed for economic reforms in China – is helping to address some of the main challenges multinationals face around liquidity, but says the true extent to which cash flows will be liberalized remains uncertain.

"We have already seen cash flowing much more seamlessly between the FTZ and the rest of the world [mainly Hong Kong to date]," says Edelmann. "But the big question mark remains to what extent the flows from the rest of China in and out of the FTZ will be liberalized going forward."

Many are asking the same question, but there are also those who believe China, given the reforms in recent years, is undeserving of being ranked top.

"To a certain extent I’m surprised that China is viewed as the least-efficient country for companies to repatriate funds from," says the global head of liquidity management services at one of the world’s biggest banks.

"India and Argentina are far harder to deal with. They still require a lot of reporting and filing with the central banks. Intercompany lending is still very difficult to set up in India, requiring a board of directors’ resolution among other things."

The banker adds: "It’s difficult to earn any interest on funds in Indian bank accounts. Companies need to keep as little money in India as possible, so a company has to estimate how much its operation in India needs for working capital.

"It’s not that easy to move money in and out of India, but it’s not impossible. I haven’t seen any moves to liberalize India."

Moving money in and out of Russia is difficult at the best of times, too, according to the survey. It must be even trickier during times of crisis.

"We do see companies looking to lower exposure and liquidate assets in Russia, given the problems in Ukraine," says the banker. "Companies are watching closely what’s going in Russia. On the other hand, Russian companies may not feel comfortable with assets in the US, given the possibility of US sanctions."

Trapped cash – money that is legitimately earned overseas, but that is fiendishly tricky to repatriate – happens for a variety of reasons, and often because of a combination of foreign-exchange controls, capital requirements, restrictions on inter-company lending, and taxation on cross-border flows and dividends paid.

The reason why it is such a problem for companies is because it can reduce a company’s ability to put cash surpluses in one part of the business to work elsewhere. This can prevent companies from offsetting debt, raising borrowing costs, and might also restrict a company’s future investment and growth plans.

Andrew Ong, head of liquidity management and consultancy for global transaction services, Asia Pacific, at Bank of America Merrill Lynch, says Asian companies in particular should be thinking about how best to deploy surplus cash and reassess the choice of currency they use to fund operations.

"In Asia, with the continuing appreciation of the US dollar against the local currencies, the previous strategy of using dollars as the local funding currency needs to be re-visited," he says.

"In relation to global funding, with solutions like MCNP [multi-currency notional pooling], companies can notionally dollarize their surplus local-currency balances and utilize Asia local-currency funds globally, such as paring down global debt or funding another region."