Features: Sector Report: Treasury & Cash Management—China

Chinese Cash Management Comes of  Age

As inbound investment into China and outbound investment by Chinese companies into regional and global markets have increased, so too have the cash management needs and wants of domestic companies and foreign multinationals in China.

By Denise Bedell

As Chinese companies dealt with the fallout from the financial crisis, improving cash and liquidity management became an ever more critical aspect of corporate treasury management. With the Chinese government easing banking and foreign exchange regulations—allowing domestic foreign currency cash pools and cross-border intra-company funds transfers—traditional cash management structures have taken root and are beginning to flourish. And as the Chinese economy powers ahead, both domestic banks and global cash management banks are working hard to provide the cash management services and solutions that companies operating in China—both domestic and multinational—are desperately seeking.

“At the beginning of the last decade the concept of cash management was still rarely known by people here, while now it is the most popular word among CFOs,” says Wu Jun, head of corporate cash management at China Merchants Bank (CMB). Part of the reason for this is the financial crisis, during which domestic companies saw first-hand the importance of effectively managing cash and making the most of available liquidity. In addition, a big contributor to this change in perspective is the relaxing of foreign exchange and banking regulations seen in recent years.

“We continue to see new regulations introduced even as some established rules get tweaked to better manage the market during these challenging economic times,” says Mona Zhong, head of cash management for corporates in China at Deutsche Bank. Domestic cash sweeps, for example, have been possible since the introduction of an entrustment loan legal framework a few years ago. In addition, two other regulations were introduced in 2009: the State Administration of Foreign Exchange (SAFE) regulations 49 and 24. Reg 49 allows foreign currency cash pools within China (not cross border). Reg 24 allows Chinese companies to move funds cross border in support of overseas subsidiaries.


Mor: Despite deregulation, controls for foreign exchange persist

The recent introduction of cross-border renminbi settlement represents a further extension of the internationalization of the Chinese currency, adding further to the developments that are having a significant beneficial impact on companies operating in China and internationally. However, one of the biggest difficulties in any global netting program or cross-border sweep or pooling arrangement continues to be the currency peg. As the renminbi is not a freely convertible currency, this remains a challenge, but the increasing espousal of domestic sweeps under the entrustment loan legal framework is a big step in the right direction.

William Mor, a director and head of treasury and trade solution products in China at Citi, says that deregulation has helped a lot, but more is needed. “It has not yet moved to the extent that companies can easily create synergies for domestic and offshore liquidity. It is still limited to a small number of qualified companies to take advantage of the deregulation to connect onshore and offshore liquidity,” he points out. “In a nutshell, while there is deregulation for documentation processing of foreign currency flows, the control for foreign exchanges continues to be in existence where the responsibility has been concentrated at the banking processing end.”

The recent regulatory changes formed part of a broader active fiscal and monetary policy management scheme by the Chinese government aimed at reducing the impact of the financial crisis on China’s economy. By loosening foreign exchange controls, regulators are attempting to increase foreign direct investment (FDI) and encourage Chinese companies to expand outside the country.

Domestic Firms Seek Global Capability
As China’s economy grows, the cash management needs of Chinese companies are changing, says Jin Kok Teoh, head of global payments and cash management at HSBC China. “In particular,” he notes, “domestic companies are looking for global and regional account and liquidity management structures, payment and collection solutions for their overseas accounts and an electronic platform to facilitate these solutions.” Teoh believes the needs of domestic companies will continue to evolve over the next few years, beyond such basic structures to more sophisticated solutions such as re-invoicing or more complex liquidity structures.

“In the past, most of our customers who required sophisticated cash management solutions were foreign companies, who were more familiar with the concept of cash management,” Teoh adds. “The recent financial crisis has shifted the treasury management focus of many domestic companies from profitability alone to the management of risks, liquidity and process efficiency.”

The financial crisis demonstrated the importance of liquidity management, and domestic Chinese companies are looking for liquidity management solutions to make full use of internal funds through optimized liquidity structures. In addition, although traditionally short-term investment tools were relatively rare, this is increasingly in demand by domestic corporate cash managers, and banks are working to provide such options within cash management solutions. Also, as many companies often have several partner banks, they are looking for a single, multi-bank platform for different bank accounts.

In addition to growth in domestic cash management, as Chinese companies begin to look outward to other markets, their cross-border cash management needs have grown. Citi’s Mor notes, “Many Chinese companies have now become the top player in their respective industry, and as a result there are more demands for overseas cash management services.” For example, as with other global companies managing a network of suppliers, supply-chain financing solutions are of increasing interest to Chinese corporates that must actively manage their supply chains as they expand abroad.

Global Banks Expand Operations
One outcome of this changing economic landscape over the past few years—which has accelerated with the global financial crisis but began a number of years before—is the importance of China as a market for global cash management banks. All of the biggest global cash management banks at the very least have strong ties to local banks, and most are growing their domestic presence.

HSBC, for example, recently announced plans to reorganize its global executive management team and relocate its chief executives to Asia. Teoh says the relocation re-emphasizes HSBC’s commitment to Asia, and to China in particular. In addition, both Citi and Deutsche Bank have announced expansion plans in the country.

As the Chinese domestic market continues to develop rapidly, both domestic and foreign banks are expanding to meet their clients’ local needs with the expansion of economic and business activities in locations other than the traditional cities such as Shanghai, Beijing and Shenzhen. For example, in December Deutsche Bank opened a branch in Tianjin that will provide the full suite of transaction banking services, including cash management. Citi also opened a full-service branch in Chongqing in December. Notes Teoh, “Companies selling into the China market—particularly the consumer markets—are rapidly expanding their business in these locations.”

Even the Nordic banks are looking to take advantage of the growing market. SEB received a license to pursue renminbi banking operations from the China Banking Regulatory Commission (CBRC) in early 2009, and Nordea has been focusing more resources on the country since opening a branch in Shanghai in April 2008.

However, the global cash management banks are facing stiff competition from domestic banks, like CMB and ICBC, that are rapidly developing their e-banking solutions, growing their cash management product offering and setting up overseas branches. “Many banks have established separate cash management departments, like CMB,” notes Wu at CMB. He says that while it is still generally an integrated piece of the business right now, in the foreseeable future cash management will evolve into its own profit center for many Chinese banks.

ICBC launched a global cash management service in November last year, targeting both Chinese companies that are expanding regionally and foreign multinationals with large Chinese operations that are looking for a regional or global solution. The solution offers accounts and investment management, domestic and foreign currency pools, centralized receipts and payments, and risk management solutions.

Xu Yan, general manager of settlement and cash management at ICBC, explains the bank’s position: “With international trade and investment developing, more and more Chinese companies go abroad. Hong Kong and Singapore, which are the focus of Chinese companies’ overseas centers, will be our focus market as well. That’s why we are launching the global cash management service for Chinese multinational companies.”


Teoh: Cash management will evolve from basic to more complex structures


Zhong: “Optimizing liquidity [is now] a priority for most corporates”

It is not simply banks that are looking to build their presence in China. More and more global companies are moving operations to or expanding operations in the country. “We are seeing an increase in the number of multinationals moving their regional headquarters to China due to the importance of its China operations in the overall strategy,” Zhong at Deutsche Bank says. “As the focus for corporates continues to be on internally generated sources of liquidity and access to the trapped cash within the corporation, optimizing liquidity has become a priority for most corporates. Treasurers are now looking at centralization, automation through technology, and standardization to minimize costs, drive efficiencies and increase control,” she notes.

In the past, Teoh says, the roles of Chinese banks and foreign banks were clear and distinct in the cash management space. Companies relied on local banks for their branch network and foreign banks for their cash management solutions. But this has clearly changed, he adds. “In recent years, the boundary has become less distinct, with foreign and local banks’ proposition overlapping each other’s traditional remit,” he points out.

This is good news for companies looking for the best possible cash management solutions in the rapidly evolving Chinese market. It means further development of solutions tailored to China, further integration of global cash management programs with regional and domestic cash management solutions, and thus the opportunity to take full advantage of the loosening regulatory regime as it evolves.