Treasury managers are playing an increasingly important role in the growth of both local and foreign-owned multinationals (MNCs) in China and the market's uniqueness and evolution continue to challenge the best of them. Benjamin Lam, J.P. Morgan's Head of Trade, China, and Michael Nelson, Head of Corporate Sales, Cash Management, China, answer the questions on challenges and best practice that top treasurers' minds today.
Q1: The treasury manager's role has clearly evolved and grown in scope. What are your observations on treasury roles in China?
Findings from the recently released Treasury Today Corporate Treasury Benchmarking Survey revealed that over 50% of corporate treasurers in Asia indicated China as the most important emerging location for regional treasury centers.
Not surprising then, that treasury managers are playing an increasingly important role in the growth of both local and foreign-owned multinationals (MNCs) in China.
Fundamentally, the functions of a corporate treasury have evolved drastically over the past years. From a unit primarily responsible for liquidity and cash management, treasury managers today have graduated to owning strategic functions such as risk and working capital management.
For treasury managers working in foreign-owned entities, their roles also entail helping the company navigate the complex and evolving regulatory landscape in China. This means that everything from overseeing the way in which a subsidiary is set up to the way a company finances its business and trading activities needs to be carefully considered from a treasury perspective.
Treasury managers are also key decision makers in Chinese-headquartered companies, especially those entities eyeing expansion of their operations beyond China. A key area of interest for them is learning how different global treasury models work and identifying the solutions that best drive multilateral growth.
As Chinese operations continue to move up the value chain, both local and foreign-owned MNCs are no longer using China only as a production base, and multiple factors are driving this evolution. For example, China, as the world's most populous nation with a fast-growing middle class, has come to represent a huge consumer market with strong purchasing power. In addition, higher production costs in China and interest in diversifying supply bases have led some MNCs shifting some of their production to lower-cost countries such as Cambodia and Vietnam, while the China office assumes the function of a supply chain management hub.
Q2: What are J.P. Morgan clients identifying as treasury priorities in China?
From dialogue with our clients, we see that optimizing working capital and risk management will remain top priorities for treasury managers in China as the economy enters into a slower but sustainable rate of growth. With the rapid internationalization of RMB, navigating regulatory changes is also critical. Supply chain financing is likely to move up in the corporate agenda as companies grapple with the need to safeguard the health and liquidity of their key trading partners, as well as to efficiently manage their own working capital needs. Managing bank relationships is also important, as treasury managers place a greater emphasis on optimizing reserves and credit lines to help them weather challenging times.
Q3: What of key challenges? What's keeping treasury managers in China on their toes?
Unlocking trapped cash, improving cash management inefficiencies and gaining visibility and control over working capital are the most common challenges treasury managers in China face. This is especially acute in MNCs operating on multiple enterprise resource planning (ERP) systems, and following varied payables and receivables processes across their entities in China.
Treasury managers are seeing a greater need to safeguard and support their own supply chains with supply chain financing programs to ensure that they can continue to meet orders amidst a challenging global operating environment.
External factors such as negotiating currency and capital controls, understanding the latest regulatory changes, securing business funding and managing sovereign, credit and counterparty risk are also key challenges for treasury managers in China.
Q4: What would you highlight as best practice in answer to these challenges?
While it may seem obvious – the best practice in unlocking trapped cash is to avoid the build-up of trapped cash in the first place. This can be achieved by optimizing capital structures to maximize the debt/equity ratio so that cash can be used to pay down debt. Recent regulatory changes that allow the denomination of shareholder loans in RMB rather than foreign currency and relaxation in the approval process for RMB disbursement will also benefit companies considerably by expanding options and improving efficiency.
In situations where cash has built up and the paying down of debt is no longer an option, the creation of an efficient cash pooling structure can allow MNCs to balance entities with surplus cash with the ones requiring cash. The use of cross-border entrustment loans is increasingly popular as a means of repatriating funds to the corporate headquarters if it is located outside China.
Where none of these options are applicable or desirable, MNCs can try to maximize yield on their local cash balances by employing a number of methods, including investing in RMB money market funds. This is particularly relevant given the recent reduction in benchmark interest rates on RMB deposits.
Another best practice that is gaining traction in the region and China is the centralization of payments through Shared Service Centres (SSCs), which can create cost efficiencies and greatly improve visibility and control. The centralization process enables an MNC to achieve standardization and automation of processes across its entities and leverage (with the right provider) state-of-the-art electronic banking platforms provided by its banking partner.
In the U.S., supply chain financing is widely accepted as a solution for improving key performance metrics such as Day Sales Outstanding (DSO) and Day Payables Outstanding (DPO) to improve working capital efficiency. This concept is beginning to make inroads into China as more companies set up their regional treasury and supply chain management bases here.
By providing suppliers with a means of accessing liquidity through their partner banks based on the strength of their own credit standing, MNCs and other large buyers are supporting their suppliers and ensuring they can continue to deliver even amidst adverse economic conditions. Ultimately, this supplier financing solution will enable a buyer to improve its DPO by standardizing or improving payment terms, while providing suppliers with a stable, cost effective financing option.
Others are institutionalizing supply chain finance into wider working capital strategies, which allows them to monetize receivables from well-rated counterparties on an ongoing basis.
Q5: Any advice for addressing currency and capital controls and other regulatory risks, or managing sovereign, credit and counterparty risks?
In terms of risk management, the best practice here is to adopt a pro-active approach and pay greater attention to the credit-worthiness of key business and banking partners.
Bank Acceptance Drafts (BADs) are commonly used in China as a payment and settlement tool. However, it is best for more efficient risk management to avoid building up large BAD volumes. Treasury managers should also constantly review the effectiveness of their company's hedging strategy and ensure that it remains relevant under the current market conditions.
In terms of regulation, international banks like J.P. Morgan play an important role in helping MNCs understand and interpret the impact evolving regulations have on their business. It is essential to set up an ongoing dialogue with your banking partner to keep abreast of latest developments so that adjustments can be made in a timely manner.
Q6: What's ahead for treasury managers in China?
RMB internationalization is one major development that treasury managers in China should keep on their radar. Since the launch of the RMB Cross-border Trade Settlement Program in 2009, the People's Bank of China (PBoC) continues to issue new policies in areas such as account opening, trade and foreign direct investment. This offers corporates greater flexibility for conducting international business in the emerging currency.
One recent announcement to note is the expansion of the RMB trade settlement program, which allows all mainland companies with an import/export license to invoice or pay in RMB. This not only provides strong impetus for importers/ exporters to transact in RMB, but also removes foreign exchange risk from the onshore Chinese entity, which improves control and liquidity management for corporates with intercompany flows.
Treasury managers should leverage their bank's local expertise and more importantly, look to leverage strong global platforms to optimize their financial operations and prepare the business for growth in challenging but ultimately rewarding markets such as China.