Companies, no matter which industry they operate in, are keen to have a share of the Chinese market, as the nation continues to be one of the world’s fastest-growing markets. As multinational corporations (MNCs) expand and develop the business structures necessary to support this growth, those used to a single global or regional treasury policy will find China a unique case, and treasurers will face multiple obstacles in merging Chinese operations into an existing treasury function.
However, while these foreign companies can gain from the range of treasury solutions available, the processes and technology offered in China is not as advanced as the western world. And to overcome these barriers successfully, treasurers and chief financial officers must understand how best to manage profits generated by their Chinese subsidiaries.
For example, cross-border foreign currency netting – a process that offsets payables against receivables between multiple group companies – is not allowed in China due to foreign exchange (FX) controls.
Chinese subsidiaries of a foreign company with global netting arrangements can only participate by following their global netting calendar and settling with their respective overseas intercompany contract parties via a gross in and out approach. This means that the transaction is settled on a one-to-one basis without bunching or netting with any other transaction.
Perhaps a better solution is to do netting offshore in Hong Kong. The Hong Kong Monetary Authority recently streamlined its renminbi netting procedures for specific MNCs to spur the usage of the Chinese currency in cross-border trade settlements.
Similarly, MNCs are not be able to centralize their Chinese FX transactions and hedging activities at treasury centres or in-house bank overseas, due to restrictions on passing on gains or losses cross-border to their subsidiary operations. To ensure a Chinese subsidiary is effectively hedged, MNCs should hedge onshore instead.
In addition, in some industries that require an MNC to form a joint venture (JV), the foreign counterparts might find their local partner unwilling to surrender control to a centralized treasury centre, even if they hold a minority position in the JV. This is because the concept of centralization is still relatively new in China.
As a result, MNCs might need to alter their approach in China and step away from their comfort zone of a centralized organization. This could include setting up a separate structure for their Chinese subsidiaries or operating a certain level of decentralized treasury functions.
Cash repatriation
Another onshore issue for MNCs is the repatriation of cash back to a company’s overseas headquarters. This can be challenging if the regulations that govern the repatriation of proceeds from Chinese firms are not well understood.
An important consideration for MNCs operating in China is the issue of trapped cash. As Chinese companies are limited from participating directly in cross-border cash pooling platforms, treasurers might need to find alternative methods of repatriating surplus cash from China.
Commonly adopted repatriation methods include dividend payments, royalties, service fees and management fee allocations, all of which come with restrictions.
Dividends, for example, can be declared once a year after an annual audit, but there is a reserve requirement to wholly foreign-owned enterprises to retain 10% of their retained earnings from distribution until the accumulated research reaches 50% of its registered capital.
This is why companies should give careful attention to cash management such as reducing cash flows into China or using their accumulated cash for further expansion into the Chinese market.
In general, treasurers often prefer to move balances to offshore markets where more investment options are available. For onshore balances, options other than bank deposits should be evaluated carefully with MNCs’ investment policy.
Like other emerging markets, China is infamous for its regulated environment. Until the laws and regulations pertaining to treasury-related operations are relaxed, MNCs are still expected to continue to face difficulties in managing their treasury functions.
However, this is an easy obstacle to overcome, but only if foreign companies are willing to adapt to and understand their own position and the ever-changing business environment in China.