Centralizing Risk Management

Efficient management of FX risks requires concentrating it at a level where appropriate skills and tools are available. In the past, restrictions on free movement of renminbi meant that FX risk management strategies had to be conducted at an onshore entity level rather than centralized at the regional or global level. While currency risks could be hedged offshore, such as using NDFs, deploying it and other alternatives came with their own disadvantages.

Today, companies can reduce currency and funding mismatches by switching to renminbi invoicing and settlement. To the extent that affiliates or third-party suppliers and customers are persuaded to use the currency, this may reduce FX exposures and enhance risk management capabilities. At the very least, companies can have their China entities pass their FX exposures to affiliates abroad, and then further centralize risk management to regional treasury centers that are best placed to manage hedging activities and improve efficiency, visibility and control.

Globalizing Cash and Liquidity Management

In the absence of exchange controls and other currency-related restrictions, companies rationalize domestic banking and mobilize cash on a regional or global basis to reduce debt, minimize reliance on external financial markets, and run the company with less operating cash. Past restrictions meant that companies often ended up with inefficient banking structures and trapped cash in China.

First, even where a company had centralized back office operations (e.g. using a shared services center), the requirement that cross-border settlements be accompanied by physical delivery of hard-copy supporting documents to the local bank made it difficult to rationalize accounts. Today, there is less dependence on supporting documents. Renminbi cross-border payments for trade settlements may be made on a paperless basis. In some cities, even foreign currency payments may be made on a similar basis. This has allowed companies to rationalize domestic bank account structures with their regional or global bank, in addition to improving efficiency using paperless solutions.

Second, restrictions on the cross-border movement of cash hampered companies' ability to incorporate China into global liquidity structures, leading to trapped cash. This was particularly true when trying to mobilize cyclical surplus cash across borders. Today, multinationals can link their domestic operations into cross-border liquidity management structures. This applies to both renminbi and foreign currency flows, although different requirements need to be adhered to.

There are additional advantages in operating from the SFTZ, whereby regardless of whether companies are regional headquarters, operating centers, or international trade settlement centers, they can pool foreign currency or renminbi with offshore entities with no borrowing quotas on the RMB cross-border sweeping; whereas, for companies that operate outside the SFTZ, there are specific qualification criteria as well as borrowing quotas on the RMB cross-border sweeping.

To determine an action plan, treasury teams should conduct a self-check on their liquidity management. Does the company's current China liquidity management deviate from the global standard process? If so, given where liquidity is generated and required, does it make sense to connect China domestic cash pools with the company's regional or global cash pool? Of course, apart from cash and funding needs, relative onshore and offshore interest rates, and tax considerations need to be factored in.

Deploying Advanced Treasury Structures

Globally, multinationals deploy structures such as netting, in-house banks, and payment-on-behalf-of (POBO) to increase the efficiency of their cross-border treasury management. As with FX and liquidity management, these advanced structures were previously not possible in China, apart from very limited circumstances.

Today, renminbi and foreign currency netting, including the deployment of POBO and receviable-on-behalf-of (ROBO) structures, are permitted under the People's Bank of China (China's Central Bank) and State Administration of Foreign Exchange's pilot schemes. Pilot companies are allowed to net-off their payables and receivables with an offshore center, under certain considerations. Approved pilot companies can establish an entity to make or collect cross-border payments on behalf of other China entities within the group.

Since these advanced structures may offer further benefits in foreign exchange risk and liquidity management, we believe that companies should consider these options as part of their planning.

Embracing The Opportunities

Experience shows that China is determined to continue driving renminbi internationalization. The significant regulatory changes to date enable multinationals to integrate existing China practices into established global processes. Many are realizing enormous benefits in increasing overall control, efficiency and effectiveness.

At the same time, it is only realistic to recognize that the regulatory environment remains complex. Different regulations apply inside and outside of special zones such as the SFTZ, and they are subject to frequent changes. Equally, many applications sometimes involve intricate dialogues with regulators, rather than simple submission of forms. To take full advantage of China's evolving treasury landscape, it is essential to maintain a close dialogue with a banking partner that has up-to-date knowledge of regulatory developments, strong relationships with all relevant regulators, as well as the global capabilities to meet the needs. It can make a difference in achieving a company's goals in China.

Kelvin Ang
Director, Americas Head
Treasury Advisory Group
Treasury and Trade Solutions, Citi

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