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.”
Trapped cash is a perennial issue for companies worldwide, but it has become more urgent since the 2008 financial crisis, which elevated the importance of prudent cash and liquidity management for corporate treasurers.
National governments are keen to see repatriation restrictions eased too, and for good reason. JPMorgan estimates that, for example, somewhere between 25% to 40% of cash held by non-financial S&P 500-listed companies is sitting in offshore or overseas jurisdictions. This equates to a staggering $400 billion to $1 trillion in offshore or overseas deposits.
Companies, and their governments, will have to be patient for restrictions to be eased in the way they want, but that they are happening at all is a promising sign and positive development that is accelerating.
“The gap is closing between developed markets and faster-growing markets, such as India and China, where the cash-management landscape is evolving quickly,” says John Laurens, head of global payments and cash management, Asia Pacific, at HSBC.
“The launch of NACH [National Automated Clearing House] in India in 2013 and the increase in pilot programmes to manage excess liquidity in China both reflect the changing dynamics.”
He adds that while the payments and cash-management infrastructure in India might have been seen historically as complex and fragmented, growth in the Indian economy has created a need for a capable payments infrastructure.
“In China, meanwhile, a simplified cross-border settlement process and further exchange control and interest-rate liberalization are progressing,” says Laurens. “The State Administration of Foreign Exchange has been transforming administrative processes that will lead to greater consistency and transparency via a number of reforms to current-account and capital-account rules.”
And as more international companies start to take advantage of the new regulations in China around the renminbi, RBS’s Oldale says this will help the wider perception that more can be done around cash positions in the country.
“This will take time to happen,” he says. “But as more liquidity structures are put in place and banks build out their capabilities and advisory services to help companies benefit from these new regulations, we will see an improvement in the perception of the movement of cash into and out of China.”
Mark Raddan, UK partner at KPMG, says in addition to this it should be borne in mind a company’s experience in China very much depends on what industry it is operating in.
“If you have a manufacturing base there, rather than just exporting goods with a sales force, this tends to be viewed more favourably by the local government as well as reducing the amount of net cash that needs to be repatriated,” he says.
“What a country wants to see are companies creating jobs so they therefore make the rules easier for companies with manufacturing operations in China. Countries don’t want to be used just as an export market. With a manufacturing base in China, there are lower taxes and it’s easier to repatriate cash.”
Oldale argues China is proactively taking strides toward opening its market and allowing multinationals to take advantage of their operations and cash generation in the country to benefit their wider-working capital needs.
However, he says, the regulatory landscape in India remains restrictive for multinationals, and particularly in the area of cash and liquidity management.
“There are few options for repatriation other than dividends, and there is no sign this will change in the near future,” he says.