It’s a good time to be an auto parts manufacturer supplying China. Johnson Controls has been supplying new battery systems for engine stop-andgo technology systems both to MNC auto makers and local Chinese car manufacturers and sales are growing sharply. One factor helping support sales is that the company can now settle imports of batteries manufactured outside China using Chinese yuan (renminbi, or RMB).
China has been pushing for settlement in RMB since 2009, with spectacular results. According to Swift, RMB was already the world’s seventh largest settlement currency by May 2014. RMB settlement brings benefit to importers in China as it eliminates the need for hedging FX risks. More companies are now willing to settle intra-company trade using RMB as they find managing FX risks offshore easier and more efficient.
RMB settlement is just one of a series of deregulations happening in China that affect treasury. Johnson Controls has also carried out cross-border RMB lending, another major breakthrough, to allow its parent company to tap into cash trapped in China.
Despite these initiatives, Roger Sun, treasury director at Johnson Controls in Shanghai is not willing to followas soon as they happen. He would rather adopt a waitand- see attitude.
“To follow regulatory changes, you may find yourself wasting a lot of time and effort this year as changeshappen so fast,” Sun says. Regulations can appear conflicting. One example is setting up a US dollar cash pool in the pilot Shanghai Free Trade Zone (Shanghai FTZ). The Shanghai FTZ has only recently been established. But since September 2014, according to the regulations, building an FX cash pool will be allowed only for companies with entities in the Shanghai FTZ.
However, earlier this year, the State Administration of Foreign Exchange (SAFE – China’s regulator on foreign exchange) issued a regulation whereby all qualified companies in China are allowed to set up a FX cash pool. The need to be present in the FTZ for that purpose appeared to be obsolete. “Compared to earlier years, when regulatory changes were infrequent, now it becomes too tiresome a job to follow regulatory changes in close steps,” says Sun. “I’d rather focus on the medium to long term and try to understand the impact of these changes to treasury practices in China, rather than being driven by all these changes.”
Shanghai FTZ an accelerator
Even so, the Shanghai FTZ has helped accelerate deregulation and there remain high hopes for it becoming a beachhead for capital account liberalisation, inter-est rate relaxation and RMB internationalisation.
Dover Corporation is one of the few to have actively participated in a series of new pilot schemes rolled out in the FTZ. It set up a tradingrelated account in the Shanghai Waigaoqiao Bonded Zone (a precursor to the Shanghai FTZ) back in 2012, when regulatory changes in the bonded zone then allowed companies to settle trade more efficiently. Dover has also set up a RMB cash pool to concentrate cash in Chinese currency from a dozen legal entities in China. The pool header of the RMB cash pool is placed in an account registered in an entity in Waigaoqiao.
All the stars were aligned to push for cross-border RMB sweeping, an idea Dover had wanted to pursue since it set up an RMB cash pool back in 2012 to better use its onshore cash. So when the FTZ opened, Dover was one of the first companies to get the approval for RMB crossborder sweeping. Sweeping went online in April 2014. Now the pool header of the RMB cash pool in China, which resides in the FTZ, links directly to the overseas pool header in Singapore, says Rachael Miao, financial director of Dover China. Excess cash over a certain preset limit is automatically swept to the overseas pool header at day end.
Being in the first pilot came at a price. Miao attended numerous meetings with government officials from the People’s Bank of China (PBOC), China’s central bank, SAFE, officials at the FTZ and Shanghai Financial Services Office, to understand the practicality of the deregulation and voiced concerns from the corporate perspective. “It’s very time consuming,” she admits.
The fact that only companies which have set up legal entities or have opened accounts within the Shanghai FTZ – an area some 30 kilometres away from the financial district in Lujiazui and traditionally only a bonded trading zone parked with lorries and containers, but not office buildings – made things worse.
Despite the government’s push to attract MNCs to set up Asia-Pacific treasury centres or move their holding companies into the FTZ, few have done so. “Even for us to set up a sub-branch within the zone, the government had to force a local bank branch to move to make room for us, and the quality of the office buildings are below our usual standards,” says one transaction banker from an international bank.
Indeed, the MNCs which have been participating in the pilots in the FTZ all have already had some activity within the zone. Decathlon, the French sportswear retailer, is one such. It has now turned its entities in the FTZ into a holding company so that it can benefit from new measures implemented in the zone, according to Olivier Menard, CFO and COO of Decathlon China.
However, Decathlon hasn’t participated in any pilots yet. Establishing the holding company structure is designed to be better prepared for the future.
That’s the same reason Sun from Johnson Controls didn’t rush to act. “Crossborder two-way sweeping of RMB is not something we’re focusing on right now,” he says. “It’s something we will look at in the next six months.” By the end of 2014 he expects that all qualified companies in Shanghai will be able to participate.
Best practice now
Recent deregulations in China may appear disorientating, especially given the speed they are emerging, leaving little time for interpretation or implementation. Even so, changes mean that China is no longer a disconnected piece of the global treasury jigsaw where cash is trapped and the capital account is wholly controlled. MNCs are now implementing global cash management best practices in China and are integrating local treasury into the global picture.
Continued cash centralisation is a major area of development, as is linking China cash to global liquidity pools via cross-border lending and cross-border two-way sweeping between onshore and offshore cash pools.
With more centralised cash management, some companies have started to implement centralised payments and receipts on behalf of, or the POBO/ROBO/COBO model. Siemens has set up a central electronic based payment process for FX in China via internal clearing accounts using a pay/receive on behalf model, which aims for straight through processing. AkzoNobel, meanwhile, has applied the same payment factory model it uses globally to China.
Netting is another area companies are eager to implement in order to manage FX exposures better and to reduce FX volumes and cost. Samsung Electronics was at the leading edge of this, generating substantial cost savings and more companies are following suit. Dover plans to participate in US dollar netting pilots. TRW, the auto parts manufacturer, is setting up a US dollar cash pool in China, which aims to include its China payables and receivables in its global intercompany netting system located in the Netherlands. “The Shanghai FTZ opens up broad opportunities for TRW to further maximise its working capital management and risk management,” says Jane Hua, TRW’s Asia- Pacific treasurer. “The new platform will provide synergies for TRW regionally and globally.”
A third area of development is cross-border settlement in RMB. Decathlon sourced one third of goods sold in China from the Asia-Pacific region and about one sixth from Europe. It now settles all intra-company trade in US dollars. However, as a European company, settling trade in dollars for goods sold in China means that Decathlon has to manage FX hedging of three currencies: euros, dollars and RMB. “If RMB settlement is approved by the headquarters, we can reduce our FX risk management for only two currencies, RMB and euro, and manage the hedging overseas,” Menard says.
Dover hasn’t started settlement in RMB either. But with cross-border RMB sweeping up and running, it now has an overseas RMB pool which could theoretically provide the cash necessary for trade settlement in RMB.
Still roadblock to clear
Despite rapid changes and the hope for full integration of China treasury operations into the international framework, there are still many roadblocks to clear fully to implement global practices.
Take netting for example. As a company moves to a centralised FX payments and receivables model, it still needs to deal with local tax authorities on export rebates (of 17% VAT). “How to communicate with local tax authorities and what kind of documentation we need to provide to facilitate the smooth handling of the tax rebate is still something we need to find out,” TRW’s Hua says.
Another area of concern is straight-through processing. To meet compliance requirements on cross-border netting, companies need to be able to provide all trade-supporting original documentation. With companies now trying to digitise all documentation flows to improve processing, getting government regulators up to speed and accepting digital documents is a challenge.
Customs offices are yet another area where efficient processing may be delayed. For all the talk of digital customs which allows smooth processing of goods flow, customs offices still fail to provide adequate support.
“Cash centralisation, automation, digitising flows of information and increasing visibility, these are the key areas of improvement for MNCs in China,” says Pei Yigen, executive vice president of Citibank China.
With accelerated deregulation, treasurers will indeed have more on their plates to work on.