Creating a Greater China cash management strategy


Despite the publicity surrounding the internationalisation of the renminbi (RMB), a significant number of corporations continue to postpone the development of their cash management strategy for Greater China. Typically, this is because treasurers and finance directors believe there are still many technological and infrastructure hurdles to make the process worthwhile. But as Lewis Sun, Head of Sales China, Global Payments and Cash Management at HSBC explains, this assumption is no longer correct and implementing such a strategy now can reap substantive dividends in terms of both local and global working capital efficiency.

Cash management strategy

While China's various RMB deregulation initiatives have held most of the limelight, behind the scenes other important changes have been taking place. The technical obstacles that have previously hindered efficient cash management across Greater China have been quietly disappearing. While it is not yet possible to achieve the level of domestic cash/liquidity efficiency attainable in regions such as North America or Europe, the gap is closing to the extent that immediate action can still deliver tangible financial benefits.

   

Rapid deployment of global standards

An obstacle that previously hindered the incorporation of China within existing global corporate cash processes was standardisation - or rather the lack of it. For instance, the current SWIFT XML format did not exist when the original version of China's Real Time Gross Settlement (RTGS) clearing system -  China National Advanced Payment System (CNAPS) was being developed. Therefore the People's Bank of China adopted a version of existing SWIFT MT messaging that supported double byte characters, which became known as 'Chinese MT'. Unfortunately the use of double byte characters meant that this messaging could only be used domestically, not internationally[1]. In addition, there were limitations on how corporates and others could use the messages' unique fields to capture the information they needed to reconcile their bank accounts systematically.

These limitations will no longer apply after 2014. CNAPS II, which will gradually replace the original CNAPS system during 2014 and be fully live in Q4, will be entirely compliant with SWIFT XML, which supports double byte characters anyway. Therefore all the unique field capabilities that are used for capturing reconciliation data will also be fully compliant. The net result is that all SWIFT messages sent via CNAPS II will be globally compatible, so straight-through-processing for both accounts payable and accounts receivable will be readily achievable.

Some major multinationals have already moved to reap these benefits - and not just foreign multinationals. For example, while SWIFTNet is being used in China by multinationals as a global link to control their onshore cash management, it is also finding favour with some Chinese multinationals for their global cash management. The bank-agnostic nature of SWIFTNet is seen as particularly attractive in this context as a means of streamlining processes, while not being tied to a specific bank and its technology. What is also striking is the speed with which Chinese multinationals are responding to the opportunity. When one considers that SWIFTNet is a technology previously used by perhaps five or six hundred of the largest global multinationals, the speed and efficiency with which some Chinese companies have adopted it is remarkable.

 

Corporate technology and processes

The increasing efficiency available in cash management technology and processes is now replicated more generally elsewhere in China. Recent years have seen major progress in the technology used by corporations in China, with many multinationals now using the latest versions of major ERP systems there.

This has gone hand in hand with similar progress in accounts receivable reconciliation. Previously the emphasis was primarily on receiving payments as quickly as possible, but nowadays the focus is far more on accurate reconciliation for credit control and accounting purposes. Companies have realised that performing this reconciliation by having multiple personnel calling up every customer that sends a payment to find out which invoices it covered is not the only possible method (let alone being highly inefficient). There has therefore been a switch towards maximising automated reconciliation within the ERP or accounting system, with personnel just focusing on exceptions.

This growth in processing efficiency and automation has been accompanied by the rising popularity of shared service centres. Corporations entering China typically set up multiple legal entities and it clearly makes sense to have one expert team managing the accounts receivable and payable processes for all of these under one roof.

These various improvements in corporate cash management technology and processes also mean that China now has a pool of skilled finance personnel accustomed to working with the technology and methods familiar to multinationals in other regions. Therefore, enhancing technology and processes for Greater China cash management no longer runs up against a skills shortage.

 

Enhancing onshore liquidity management

While there has recently been considerable regulatory change regarding offshore RMB liquidity management, this has not been mirrored domestically. Currently the only permissible way of performing onshore RMB liquidity management remains the use of an entrusted loan structure. The downside to this is that in China there is a business tax charge levied on each loan made within a structure: normally 5%, plus a 0.1-0.5% local surcharge that varies from city to city. For example, if using a standard zero balancing approach, a cash rich entity would lend its surplus to the header account, which would in turn lend to a cash poor entity - but unfortunately for tax purposes this would count as two loans and attract an assessment of tax twice over.

At first glance, for corporations running multiple legal entities with fluctuating balances, this may seem to be a substantive reduction in the benefits possible from creating a China cash management strategy. However, an alternative technique that can legitimately (and considerably) reduce the tax charge is a tax-optimised structure, sometimes called 'horizontal sweeping'[2], as offered by HSBC. Instead of all cash rich entities loaning to the header account and funds being redistributed to cash poor entities, horizontal sweeping takes a more discerning approach.

It calculates the optimal way to transfer funds among cash rich and cash poor entities while minimising the number of loans. Any funds moved only pass through a dummy account at the bank (not a header account) which is not deemed as an additional loan and therefore automatically reduces the number of taxable loans by at least 50% compared to a zero balancing approach. The administrative overhead from the corporate perspective is negligible, as all the system set up and reporting is provided by the bank and once up and running is completely automated.

The reduction in tax charges achieved by horizontal sweeping maximises an important benefit by reducing unnecessary borrowing. This is especially significant in the current onshore lending environment, where external liquidity sources are already expensive and becoming more so (even for well rated companies). Furthermore, apart from the domestic liquidity benefits, horizontal sweeping also opens the door to efficient up-streaming of liquidity to regional or global liquidity management structures.

 

Reshaping cash management: B2C

One of the most notable changes in the Chinese financial landscape recently has been evolution of consumer payment channels based upon the latest internet and mobile technologies. Corporate cash management in China is no longer just driven by the business to business infrastructure. Third party payment agents have transformed the landscape by providing a highly efficient and centralised method of collecting mass consumer payments, both online and offline - a point not lost on global retail consumer brands.

The attraction of third-party payment agent platforms is that they provide a highly efficient and transparent means for collecting from individuals, thus allowing all retail collections to be consolidated into a single coherent electronic channel. The costs and inefficiencies associated with processing cash and cheque payments are avoided, and there are also advantages over running card payments in house. On third-party agent platforms in China, customers' debit/credit cards are linked to their mobile phones, so there is no need for consumers to carry their cards with them, nor type in card and verification numbers, which reduces the barriers to making and paying for purchases.

As a result of these various advantages, it is now increasingly common to see retailers in China establishing their e-commerce platforms from the outset using just a third-party agent to process customer payments. Such services have also been rapidly expanding to more service industries such as catering, entertainment, taxis, etc.

 

Greater China

A further convenience that aids the creation of a cash management strategy for Greater China is the tighter integration of the constituent territories. For instance, there is now a high degree of interaction among mainland China, Hong Kong and Taiwan. Even trading companies with their primary presence and large trade volumes in Hong Kong and Taiwan have growing engagement with counterparties in mainland China, be they inter- or intra-company transactions.

Therefore many multinational corporations no longer look at their treasury or cash management team for mainland China as being just for the mainland. It is increasingly common for their cash management or treasury teams based in perhaps Shanghai or Beijing to service all of the countries and Special Administrative Regions in what is commonly referred to as Greater China, i.e. mainland China, Hong Kong, Macau and Taiwan.

This greater cohesion has become possible because of the advances in technology and processes mentioned earlier. Previously when technology was limited and processes were manual (and probably also specific to each location), it would have been next to impossible to manage the entire market under one roof. Now, assuming all the business entities/locations are using the same technology, the shared service centre managing their transactions could be located anywhere. (Though for various reasons including costs, personnel availability and state incentives, certain locations in mainland China are becoming increasingly popular.)

Interestingly, the benefits of this Greater China model can now also extend into the B2C payment space. Chinese third-party payment agencies are keen to deploy their technology overseas and this increasingly involves Hong Kong and Taiwan, as well as mainland China. The potential efficiencies of this expansion even apply at the currency level, as it is now possible to place orders online denominated in RMB in Hong Kong and Taiwan.

 

Choice of bank

Choice of bank has an appreciable influence on the benefits achievable from a Greater China cash management strategy. Apart from a willingness to innovate, another important consideration is willingness to invest in technology and infrastructure that works consistently across China as well as globally. For example, is the bank fully SWIFTNet capable? Can it automatically capture accounts receivable data and support the latest SWIFT XML bank statement format for automated reconciliation? Can it offer automated accounts payable processing based on the new SWIFT XML format? Any gaps in these areas will materially impact the benefits a corporate can achieve from its cash management strategy in Greater China.

 

Conclusion

Many corporations still regard Greater China as an exception from a cash management perspective that requires non-standard treatment. The assumption that this is necessary on the grounds of infrastructure and technology is no longer correct, as China is now enhancing its financial infrastructure and adopting all the latest financial technologies that would be available in any mature market. At the same time, a pool of skilled staff familiar with these technologies and associated processes is also developing in parallel with locations particularly favourable to shared service centres.

Furthermore, the regulatory changes of the past couple of years also mean that Greater China no longer stands in isolation. To a large extent, it is as accessible as many developed markets from a global liquidity management perspective - which only makes the argument for creating a Greater China cash management strategy that can be linked into a global context all the more compelling.

 

[1] Prior to the introduction of SWIFT XML, MT messages were transmitted in a method similar to telex, with the last digit being used for zero-sum checking and therefore effectively meaningless in data terms. However, in the double byte 'Chinese MT' messages, the last digit was meaningful - thereby creating a conflict.

[2] For an example of a practical application of this, see ”AkzoNobel: optimising cash management in China


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