For this reason, Honeywell's Asia regional treasury is split in two: Shanghai treasury focuses on Greater China, Hong Kong and Taiwan, while the Singapore office still covers the rest of Asia Pacific. Lim views the two as comprising a singletreasury center. While each serves its respective region, they operate under the same mandate and present one face to headquarters. Lim is the common denominator.

Lim also points out that many companies define their regional treasury functions differently. Honeywell's regional treasury is responsible for bank relationships, mandates, facilities, funding, hedging, guarantees and the like, but cash pooling and core treasury activities are handled on a decentralized basis.

IT'S A BIG COUNTRY

But Honeywell faces its own set of challenges within China itself because of its fragmented presence there. The company maintains over 100 bank accounts with 15 banks in China to support its 20 legal entities. Lim says this fragmentation is a key challenge for Honeywell from a treasury and risk perspective. "So many corporations toggle between a local and foreign bank, but you cannot leave outside the equation what to do with a local banking partner," says Honeywell's Lim. "A corporation with a diverse presence in China will have many partners by default."

In fact, challenges to performing traditional treasury functions from a China-based treasury are numerous, according to Patrick Villers, managing director for global business services for General Electric Co.'s corporate treasury. Villers can provide a list of functions that just aren't possible right now in China. For instance, a prohibition on intercompany lending complicates local funding and impedes the ability to optimize liquidity. According to Villers there are three funding alternatives available: local bank lines, entrusted loans and cross-border loans. Borrowing is restricted to a regulated rate based on the People's Bank of China's (PBOC) central bank reference rate. The entrusted loan, a widely used alternative, is an indirect, bilateral intercompany loan, which uses a local bank as intermediary. A sweep mechanism created through a multi-entrusted loan structure has become available more recently. Entrusted loans are generally viable for short-term lending. However, the associated fees can be a drawback.

Cross-border funding is complicated by the lack of a developed forward swap market. Only the Big Four Chinese banks are authorized to handle FX forwards, which are limited to currency exposures up to six months. For longer durations companies must hedge offshore using nondeliverable forwards, with the associated FAS 133 complexities. While companies like GM, Honeywell and GE have no problem attracting funding commitments, Villers points out that the cost of funds sometimes hurts competitiveness. China's regulated market and limited treasury products restrict GE's ability to leverage its triple-A rating to cheaply source funds.

Then again, even sophisticated multinationals that may be household names outside of China more than occasionally find local banks unwilling to accept a parent guarantee or letter of comfort. In these cases, Shirley Chan, head of cash management for Greater China at Deutsche Bank AG, suggests that a local bank might sometimes prefer to take Deutsche Bank's guarantee. While foreign banks cannot lend in local currency directly to certain companies, this is one way they can at least lend support.

Given Asia's size, cultural diversity and varied regulatory and tax environments, many companies choose to handle day-to-day treasury and finance decisions at the country or business-unit level, applying regional integration only where possible. In other words, the inability to centralize treasury activities is part of a broader regional challenge and not only China-specific. Says GM's Newman, whereas a European treasury center would typically centralize three core functions–business development (e.g., M&A activity), corporate finance, and cash management and FX hedging–in Asia centralized cash management and FX is less developed. GM's model is to use the treasury function to drive business results, and China follows this model.

In April 2003, GE was among the first to implement a daily cash sweep for its 18 legal entities in China, using a local bank. The solution employs a permitted loan structure and automates advances and repayments. Within this structure, the PBOC has accepted intercompany lending and intraday overdrafts. Overall, GE successfully reduced its idle cash and cost of funds by 50% and 34%, respectively, while increasing its deposit yield by 57%.

ROLLING WITH THE PUNCHES

GE worked with a local banking partner, which was critical to gaining access to the central bank for an ongoing dialogue and approval. Villers says GE "developed a win/win strategy" by sharing best practices with the local bank in putting together a solution that it could sell to other customers. According to Deutsche Bank's Chan, with profitability focused at the branch level, a critical part of the dialogue must be to explain the incentive of a sweep structure to the local branches themselves.

For multinationals, a key attribute needed for financial success in China has to be adaptability in approach and mindset. "In China, you learn that anything is possible–it's just a matter of how you present it," says GE's Villers.

That may be so, but for treasurers accustomed to operating within a rather explicit rule set, this becomes a tricky environment in which to function, particularly when you are trying to comply with ever more exacting internal control requirements at home. However, given the size and potential of China, most are not going to have a choice.