China: Cash management revolution under way
Pilot schemes to aid integration; FDI exacerbates challenges
Global companies active in China have come a step closer to realizing long-held ambitions to get cash out of the country more easily and integrate their Chinese treasury operations more fully into their global structures. In December, a pilot project was launched to test automated cross-border sweeping and in January a pilot foreign-currency-netting solution for the trade of goods in China was announced.
Sweeping, used by multinational companies in many countries, moves excess cash, held in various trading currencies, on a regular (often daily) basis into a regional or global liquidity basket.
Netting reduces the number of inter-company payables and receivables transactions and, in turn, the financial costs associated with settlement.
The renminbi has been gradually internationalized since 2009, but these latest pilot programmes have come sooner than expected. Provided they are followed up with a formal change in policy, the ability to include China in corporate sweeping and netting structures could revolutionize cash management in China. By bringing China into line with cash-management practices in much of the rest of the world, big savings and improvements in risk management should be possible.
Sweeping allows companies to make a better return on excess liquidity and optimize their cash management. Until now, China has refused to relax controls on outflows of cash or allow structures such as sweeping: cash has been effectively trapped onshore.
And before the netting pilot scheme, multinational companies were unable to offset their foreign-currency payables and receivables between their Chinese subsidiaries and their netting centres located overseas – curtailing the flexibility and efficiency of their treasuries.
The challenges surrounding cash management in China have been exacerbated by the large volumes of foreign direct investment that have poured into the country in recent years. Although China’s growth has slowed, FDI has accelerated since the financial crisis – as China’s growth looks increasingly attractive relative to the moribund developed world. In 2011, inward FDI reached $124 billion, compared with $76 billion in 2006-07, according to the United Nations Conference on Trade and Development.
There have always been ways for multinationals to repatriate cash from China – including paying dividends or lending to a parent company – but they are cumbersome, time-consuming and costly. The hope is that the pilot schemes will lead to companies being able to include their Chinese operations in their regional or global liquidity structures in a much more straightforward and tax-efficient way.
|Diane Reyes, global head of HSBC’s payments and cash management division|
The opening up of China’s financial infrastructure favourably affects treasurers’ ability to manage their cash positions and internal liquidity – in all markets and in all currencies, according to Diane Reyes, global head of HSBC’s payments and cash management division. "If they get it right, it will help deliver earnings-per-share growth and deliver efficient treasury and financial management processes to support revenue growth," she says. "Get it wrong and companies risk being left behind." HSBC is taking part in the sweeping pilot with Intel, which is a client, and in the netting pilot with an unnamed Korean multinational.
Robert Yenko, treasurer of Intel Asia, agrees that the sweeping pilot has tremendous benefits for treasury management as a whole. "This development opens up many more options for cross-border liquidity management, which is very important to us," he notes. "This positive development was the result of extensive collaboration between Intel and China’s foreign exchange regulators to support the Chinese government’s move to advance and further internationalize liquidity management in China."
Standard Chartered is also taking part in the foreign-currency cross-border sweeping pilot with its client Shell China.
"This is a milestone for multinationals operating in and with China," says Sridhar Kanthadai, regional head, transaction banking, northeast Asia, at Standard Chartered. "The ability to effectively manage excess foreign-currency liquidity globally is paramount to optimizing cash management for multinationals. This will encourage them to increase their trade and investment in China as it gradually opens up to the rest of the world."
The introduction of foreign-currency netting will enable multinational companies in China to maximize their operating efficiency and adopt liquidity management structures that are in line with international practices, according to John Laurens, head of HSBC’s global payments and cash management, Asia Pacific. "Given the fast-moving nature of the Chinese market, and the continued liberalization of regulations, it is essential that international treasurers remain attuned and responsive to change in China in order to capture the opportunities arising from these recently launched pilot programmes," he adds.
As well as benefiting liquidity, an easing of restrictions on sweeping and netting will allow multinational companies to centralize foreign-currency management. "Chinese operations can now be part of a treasurer’s armoury to reduce external borrowing and improve returns by consolidating cash centrally to eliminate or reduce FX exposure," says Kee Joo Wong, HSBC’s head of payments and cash management in China. "Treasurers can now have more confidence knowing that their excess cash held in China can be used for daily funding needs in their business."