China treasury operations face location conundrum
Treasurers and banks are divided on the extent to which financial-system liberalization in China has made it possible, or desirable, for multinationals to manage China treasury functions from elsewhere in Asia.
|'In general, access to foreign currencies is a key reason for western companies to set up treasury centres in Hong Kong, above, or Singapore'
For all the talk about China’s move to liberalize its FX regime and capital account, the jury is out on whether developments in the CNH market will help multinationals conduct more of their treasury operations remotely through Hong Kong or Singapore.
According to Lewis Sun, head of sales for global payments and cash management in China for HSBC, cross-border trade and offshore sweeping has made it easier for foreign multinationals to move their China treasury operations to other parts of the region.
“The benefits of running payments and cash outside of China through a regional treasury centre include finer pricing or spread from consolidation of FX transactions, payments and collections; reducing external hedging requirements; and avoidance of duplication of key resources,” he says.
“Treasury specialists and traders are scarce resources, and regional treasury centres can use expertise in one location to support their broader operations.”
Sun adds that financial-system liberalization has made it easier to handle FX payments and supporting documents, and that HSBC has seen a number of companies start to explore and implement a paperless process in managing FX payments.
“In the meantime, corporates are still required to ensure the authenticity and compliance of FX payments,” he says. “In that sense, it is still important for multinational companies to establish sound internal procedures and track records for such business.”
Conducting China treasury operations from other parts of Asia could reduce in-country costs for companies in payroll and expenses.
However, Robert Vettoretti, Shanghai-based managing director at PwC – in a renminbi guidance document published last year by the Association for Financial Professionals’ Corporate Treasurers Council – cautions currency liberalization was actually pushing companies to co-locate their regional headquarters and treasury centres in China, an approach adopted by Ford.
Ryan Hershberger, the carmaker’s Asia-Pacific regional treasurer, states companies that have operations in China were a long way from being able to manage China treasury without boots on the ground in light of complexity around FX payments and documentation.
Victor Penna, head of treasury solutions transaction banking at Standard Chartered Bank, accepts that regulatory developments have made treasury management easier for multinationals with operations in China, in the sense that trapped cash in the country can be redeployed elsewhere and offshore funds can be more easily utilized to fund operations in the country.
“However, given the complexities in China’s banking and regulatory environment, larger multinationals still need to keep a dedicated treasury team in the country to help better navigate the local market and provide day-to-day services such as executing cash management and FX deals, and providing documents and data for regulatory requirements,” he says.
While payment processing can be offshored to a shared services centre, a fully fledged pay-on-behalf-of model typically used by in-house bank structures is unlikely to be widely deployed in China, as the process remains complicated with a substantial amount of reporting to authorities required, Penna continues.
“Further alleviation of the documentation burden is still expected, though, such as balance of payments reporting, which is required for companies receiving or making a cross-border payment,” he says.
Deregulation around FX payments and conversions in China is still in the early stage and restrictions still exist, which means corporations are still cautious, acknowledges Blaik Wilson, director of solution consulting Apac at Reval.
“In general, access to foreign currencies is a key reason for western companies to set up treasury centres in Hong Kong or Singapore – even large, China-based companies run their treasuries in Hong Kong,” he says.
“When setting up treasury centres, companies usually review financial processes, tools and people to streamline workflows and support growth strategies. Modern technology goes hand in hand with the development of treasury centres, providing visibility into cash positions and FX exposures, and automating payments and documentation.”
Wilson suggests the development of the pilot free trade zone in Shanghai makes it a more attractive location for treasury operations, but accepts that operating in China is still burdensome.
“According to China’s ministry of commerce, as of the end of May, close to 10,000 companies had successfully registered new entities in the zone, but fewer than 7% are foreign companies.
“One reason is that foreign firms typically face long approval times to establish new entities there and there is also a lot of uncertainty among finance professionals on how the zone actually works.”