Treasurers cash management practices in mainland China. In-depth fundamentals to help build an effective cash management structure

Transcription

1 Treasurers cash management practices in mainland China In-depth fundamentals to help build an effective cash management structure

2 Today s presenters Marc Monyek Senior Manager, EY Financial Accounting Advisory Services Global Treasury Services Paul A. Garza Staff Consultant, EY Financial Accounting Advisory Services Global Treasury Services Page 2

3 Poll 1 Which of the following do you or your company identify with? A. Multinational companies that have treasury operations or a business function in mainland China B. Companies that are considering about going into China and setting up a regional operation C. Individuals who have interest or are conducting business research in China D. Individuals or employees who have treasury background in China or Chinese business understanding E. None of above other Page 3

4 Steps to develop leading cash management practices Guidance Cash management Challenges in China Policies and reforms Page 4

5 Mainland China Country and currency background Country background GDP per capita (World Bank) 8,027.7 USD (2015) World GDP rank (World Bank) 2nd (2015) Standard & Poor s credit rating AA (Stable, 2016) Renminbi internationalization RMB as a global trade, investment and reserve currency Regulated interest rate and exchange rate Continuous steps to liberalize Current account (daily business transactions) RMB is not a fully convertible currency, but most of the transactions are generally done without restrictions on the flow in and out of China. Capital account (investment and loan transactions) It is not yet liberalized; it is still remained closely regulated and requires approval from State Administration of Foreign Exchange. RMB s share as an international payments currency Customer initiated and institutional payments Messages exchanged on SWIFT based on value. Source: SWIFT Watch (RMB Tracker) Page 5

6 Cash management focus Assessment Do you anticipate China to be an integral part in your company s business over the next five years? Opportunities What treasury opportunities in China can companies from diverse backgrounds leverage? Challenges Which cash management-related areas pose major challenges to treasurers? Page 6

7 Cash management objectives and support Core components that impact business functions Concentration Disbursement Business planning Acquisitions Funding needs Liquidity strategy Inventory levels Forecasting Cash outflows objectives Funding and liquidity management Cash management objectives Effective control of cash Minimize cash balances Technology Receivables Information gathering, analysis, control Corporate accounting Reconciliation Budgeting Financial statements Debt management Financing Repayment obligations Credit facilities Investment management Principal preservation Higher returns planning Efficient use of funds Page 7

8 Cash management fundamentals Practical areas that are performed on a daily basis Cash flow forecasting Planning future cash requirements Liquidity levels Visibility of cash Time horizons Coordination Planning Establishing banking structure Physical pooling Notional pooling Hybrid pooling Automation Cash pooling Bank relationships Sustainability Cash strategies Building cash culture Liquidity resources Excess/idle cash Netting systems Transfer pricing Foreign exchange Optimization of cash management structure Page 8

9 How do we translate cash management and strategies from the US to China? Cash management in the US Experience: Mature process and technology Advanced concepts and methodologies Bank support and transparency Cash management in China Potential difficulties: Knowledge gap and unfamiliar market Multiple regulations and uncertainties Stress threshold and adaptation Transitioning point 2 3 Objective Problem 1 Identify critical needs Implement plan and test * Trial and error and operations assessment 4 Stabilize cash operations Result Solution * Trial and error may be partially avoided by learning from other companies and how they addressed challenges. Page 9

10 Treasurers cash management challenges in mainland China Liquidity planning Cash management Banking FX management Capital markets Difficult integration of liquidity position in China within a regional or global structure; time-consuming paperwork and extensive approvals Intercompany transaction policy developments Challenges in optimizing cash management structures, cross-border sweep and netting Trapped cash and visibility of cash Working capital and cash forecasting structure State Agency for Foreign Exchange (SAFE) and People s Bank of China (PBOC) requirements Window Guidance Multiple accounts and outflow restrictions Currency and capital controls RMB internationalization policy setbacks Hong Kong strategy CNH market Currency volatility risks Understanding of investment products and local parameters Market developments and financial restructuring Credit-worthy counterparties and quality Page 10

11 Treasurers cash management challenges in mainland China Payment/clearing systems Treasury technology (ERP, TMS) Operating risks Funding operations/ banking Regulatory Diverse, complex payment systems No single approach with collections and disbursements; cash is still commonly used Relationships with vendors and third parties Permitted technology in compliance with Chinese Generally accepted accounting principles (GAAP) and software requirements Rigid policies on information security Control mechanisms, limited internet banking Widespread fraud and cyber attacks Governmental challenges and market access Lack of legal protection and right to conduct business Limited funding options for short-term needs On-shore money market reforms and guidelines Trade financing Bank relationships: Chinese and Western providers Financial markets and Free Trade Zone reforms State Council, PBOC, and SAFE issue regulations, but interpretation and execution varies between provincial authorities and banks Page 11

12 Free Trade Zones cash operation strategy Cash pooling, FX conversions, tax, and investments Free Trade Zones (FTZs) Marketplaces that boost crossborder trade, investment, and pooling Tianjin FTZ Financial leasing, shipping, Jing-Jin-Ji structure, and high-end manufacturing Tax policies, incentives and duty free warehouse Promote internationalization of RMB Shanghai FTZ International trade, financial sector Each region has their own business characteristics and role to help deepen reforms Currently, there are at least 15 FTZs total Fujian FTZ Trade with Taiwan, production services and high-end service sector Guangdong FTZ Financial sector, customs clearance and shipping routes to Africa and Europe Page 12

13 Chinese main regulators Regulator Background Authority The People s Bank of China (PBOC) The People s Bank of China (PBOC) is China s central bank and a primary Chinese regulator. Formulates and implements monetary policy Maintains the banking sector's payment clearing and settlement systems Manages official foreign exchange and gold reserves Oversees the State Administration of Foreign Exchange (SAFE) for setting foreign-exchange policies State Administration of Foreign Exchange (SAFE) SAFE is a government agency that is responsible for regulating foreign exchange market activities and transactions in both the current and capital account. Promotes the development of foreign exchange market Provides PBOC with recommendations for structuring China s exchange rate policy Page 13

14 Key regulations in mainland China PBOC and SAFE guidance questions The People s Bank of China State Administration of Foreign Exchange What current steps has PBOC taken to improve the infrastructure of RMB internationalization? Will future changes in SAFE s policies drastically impact on forex market and previous cross-border M&A deals? How will PBOC enhance market confidence in RMB under the Current Account? How far will SAFE relax or tighten its currency controls? What are the current delays for PBOC from achieving reforms? How much impact will SAFE have on repatriation and profits? Page 14

15 Key policies and reforms in mainland China The People s Bank of China (PBOC) Approval Jul. RMB allowed to be a cross-border settlement currency (pilot program with 365 participants) Approval Sep. First foreign-issued dim sum bond by a nonfinancial company was issued by US fast-food chain, McDonald s Restructure Jul. The use of RMB to settle cross-border trades was extended to the entire country Restructure Mar. Relaxation of RMB crossborder trade settlement for all transactions Approval Sep. China State Council officially launched Shanghai Free Trade Zone Approval Feb., Nov., Sept. RMB cross-border cash sweeping (Shanghai) and pooling (nationwide) allowed and expanded Approval Aug. Intercompany lending allowed; end of using entrustment loans Notice Jan. Restricted cash pooling June. Partially lifted ban RMB cross-border settlement development (current account items) Simplification RMB cross-border settlement process and automation (current account items) Expansion RMB cross-border flows Free Trade Zones RMB cash sweeping schemes RMB capital outflows tightening, RMB devaluation Opportunities Ability to structure efficiently cash functions and sources RMB currency integration in business Source: People s Bank of China, 2016 年人民币国际化报告 (2016 RMB Internationalization Report), Annual Reports Major Rules and Administrative Documents Page 15

16 Key policies and reforms in mainland China State Administration of Foreign Exchange (SAFE) Note: SAFE regulates four types of cash transactions: Inbound payments, outbound payments, conversion of foreign currency into RMB, and conversion of RMB into foreign currency Approval Jan. Classified FX market makers into three types to increase liquidity in China s foreign exchange market and boost its development: spot, forward, and swap Approval Feb. Simplified and improved policies for Foreign Exchange Administration of Direct Investments Approval Jan. Rolled out nationwide the pilot program of the cross-border foreign exchange payment facilitation business of payment institutions Approval Jan. Improved and adjusted Foreign Exchange Administration policies under the capital account Stabilize Jan. Ordered banks in some trading hubs to limit dollar purchases in attempt to stem capital outflows. Vetting transfers abroad worth $5m or more and is increasing scrutiny of (approved) major outbound deals Currency convertibility Expected trend to ease restrictions on the currency controls system Make international transactions easier Series of currency controls system reforms (current and capital accounts) Market-stabilizing measures Steady control of capital outflows Keep financial system intact RMB transactions vetting and capital outflows tightening Flexibility Steps to allow companies to access new RMB and FX management tools Source: State Administration of Foreign Exchange, Annual Reports Major Rules and Administrative Documents Page 16

17 What do PBOC and SAFE policies and reforms mean for your cash operations in China? Key regulations Effect RMB Internationalization RMB as a settlement currency for crossborder transactions Simplified cross-border payment process Facilitate multiple forms of payments Cross-border liquidity management (pooling) Greater liberty to manage RMB cash Currency controls Expand companies ability to convert and transfer currency Ongoing steps to make RMB as the most traded currency Simplification of supporting documentation requirement Allow RMB liquidity management with overseas affiliates within FTZs Liberalize RMB in current and capital accounts Reduce onshore exposure and integrate RMB as a main currency Improve efficiency by allowing paperless solutions/automation Address the issue of trapped cash in China Greater flexibility in using RMB and FX transactions in business Improved cash operations In China Improve relationships and terms and conditions with Chinese counterparties Managing credit risk, liquidity needs and funding costs Incorporate China into the global liquidity structure Reduce the need for approvals and investigations Benefits Efficiency Feasibility Opportunities Cash management implications in China Page 17

18 Poll 2 What are some of the challenges in China that your company is currently facing? A. Regulation interpretation and guidance B. Cash management/pooling structure C. FX volatility D. Chinese/international banking support and services E. Technology selection and implementation Page 18

19 Cash management guidance Areas of focus for analysts, cash managers, and treasurers Managing RMB cash Cash strategies Bank account management Technology RMB risk management Page 19

20 Cash management, liquidity planning, and funding Page 20

21 Adopting RMB as a settlement currency Making this an integral part of cash management strategy Opportunities Payment for goods and services, intercompany loans, offshore access to RMB services and hedging foreign 1exchange exposure 4 Reduce financial risks Tools to hedge RMB exposure as its use in international trade increases 2 Access to new suppliers and customers Build strong relationships with onshore Chinese partners 5 Leverage on prices Use of RMB to settle transactions can improve a company s leverage on competitive pricing with customers and suppliers 3 Relaxed restrictions Ongoing reforms to make RMB a global trade currency, investment currency, and reserve currency 6 Savings RMB trade settlement and foreign exchange hedging can help generate savings Page 21

22 Payment systems in China Main interbank payment and clearing systems Systems China National Advanced Payment Systems Large Value Payment (CNAPS-LVPS, CNAPS II) CNAPS Bulk Electronic Payment System (CNAPS-BEPS) Local Clearing House systems (LCHs) China International Payment System (CIPS) China Domestic Foreign Currency Payment System (CDFCPS) Overview of systems Real-time gross settlement for high-value and urgent electronic payments Main clearing system for low-value electronic retail payments Regional payment systems (clear all paperbased and debit payments) Processes RMB crossborder payments Settles foreign currency payments (AUD, CAD, CHF, EUR, GBP, HKD, JPY and USD) Regulatory oversight People s Bank of China (PBOC) Complete oversight of all payment systems Payment and Clearing Association of China (PCAC) Self-regulatory body of the payment and clearing industry Cross-border Inter-bank Payment and Clearing (Shanghai) Corp. Ltd. Operate China International Payment System (CIPS) Notes: * China has diverse and complex payment systems. There is no single approach with collections and disbursements; cash is still commonly used. * There is a higher rate of payment rejection via using the systems above due to insufficient information. It is important to provide all details, including CNAPS Bank Code, purpose of payment and specific formatting of a payment. Page 22

23 Cash management models in China How modern technology fuels a progression of cash operations structure 1. Rudimentary cash management processes 2. Controls, policies and automation 3. Regional structure and expansion 4. Global liquidity consolidation Manual work, such as Excel or paperwork, is used for reporting and cash flow forecasting Payments and collections are managed locally Daily cash management (cash positioning, short-term needs) Bank account FX exposure management TMS, ERP Treasury management assessment Treasury system review Cash sweeping schemes Formalized control of payments and collections Formal policy on investments and liquidity on the national level Integration of liquidity position in China within a global structure Page 23

24 RMB cross-border sweep example Liquidity planning strategies Inside China Outside China Foreign currency account Cross-border sweep Lending Foreign currency account RMB cross-border lending account Foreign currency account Primary bank concentration account/rmb pool header account RMB account/ primary bank branch China RMB regional borrowing account (outside of China) RMB account/ primary bank branch China Borrowing Cross-border sweep RMB account/ primary bank branch China Existing bank account Cross-border bank account Page 24

25 Liquidity and funding tools in China Short-term investment and borrowing opportunities Interest-bearing current accounts Demand deposits Time deposits Certificate of deposit Money market fund Treasury (Government bills) Commercial paper (corporate bills in China) Repurchase agreements Bankers acceptance bills Short-term investment Available, but interest rate is low Available Available in RMB and FX currency Interest rate is set by PBOC Developing New guidelines Available and higher interest rates, but ongoing reforms, liquidity risks, high costs, authorities seek to slow down redemption Available for Qualified Foreign Institutional Investors (QFII) Developing Not available for FIEs Available, but uncertainties and potential counterparty risk Not commonly used Bank overdrafts Bank lines of credit and shortterm loans Trade financing Factoring (accounts receivable finance) Money market Commercial paper (corporate bills in China) Bankers acceptance bills Supplier credit Short-term borrowing Available, but lower rates are preferable in Hong Kong 3 12 month terms Loan Prime Rate (PBOC reference) Available Not normally used Available but low liquidity, high borrowing costs and credit risk Available but low liquidity and risks Ongoing reforms for a centralized national bill market Available Depending on terms and conditions ** Intercompany borrowing Permissible May require SAFE approval Flexibility vs. efficiency Notes: * Each Chinese bank may have additional and local requirements. * Some markets may be unstable due to PBOC s abrupt tightening of monetary policy and decision to prioritize risk control starting in * Although there are tools available in mainland China, Hong Kong banks may have better offerings for companies to manage RMB cash efficiently. Page 25

26 Bank account management Page 26

27 Big Four state-owned commercial banks Formerly specialized banks, commitment to RMB internationalization Big Four bank services Bank of China China Construction Bank Industrial and Commercial Bank of China Agricultural Bank of China Provides international commercial banking and financial services through the following segments: corporate banking, personal banking, treasury operations, insurance and equity investments. Top 15 global banks by total USD assets (billions) in 2015 with foreign or domestic presence in China Top 12 local Chinese banks in China by total CNY assets (billions) in 2015 Position Country Bank Total assets 1 China Industrial and Commercial Bank of China 3,420 2 China China Construction Bank Corp 2,826 3 China Agricultural Bank of China 2,740 4 China Bank of China 2,590 5 Japan Mitsubishi UFJ Financial Group 2,454 6 UK HSBC Holdings 2,410 7 USA JPMorgan Chase & Co 2,352 8 France BNP Paribas 2,171 9 USA Bank of America 2, China China Development Bank 1, USA Wells Fargo 1, Germany Deutsche Bank 1, USA Citigroup Inc 1, France Credit Aricole Group 1, UK Barclays PLC 1,660 Position Province HQ Bank Total assets 1 Beijing Industrial and Commercial Bank of China 22,210 2 Beijing China Construction Bank Corp 18,349 3 Beijing Agricultural Bank of China 17,791 4 Beijing Bank of China 16,816 5 Beijing China Development Bank 12,620 6 Beijing Postal Savings Bank of China (PSBC) 7,296 7 Shanghai Bank of Communications 7,155 8 Shenzhen China Merchants Bank 5,475 9 Fuzhou Industrial Bank Co Ltd 5, Hong Kong China Citic Bank Corp 5, Shanghai Shanghai Pudong Development Bank 5, Beijing China Minsheng Banking Corp 4,521 Source: Annual reports issued by banks. Data is reported in local currencies and converted to USD using Central Banks end of period exchange rates ( ). Data above is only for discussion purposes with regard to market presence in China and is not to be considered an official citation of the bank listing. Page 27

28 Resident vs. nonresident entities in China Bank account opening current restrictions Resident entities Nonresident entities 1 Onshore renminbi Yes Yes, but this needs approval from PBOC 2 Onshore foreign currency Yes Yes 3 Offshore renminbi Yes Yes, but this needs approval from PBOC 4 Offshore foreign currency Yes, but this needs approval from SAFE Yes Note: Each Chinese bank may have additional and local requirements. Offshore RMB bank accounts RMB accounts can be opened outside of mainland China, particularly in Hong Kong and in other jurisdictions (Singapore, London) as well. Foreign companies do not need to have a legal entity established in mainland China or in Hong Kong to open an offshore RMB account. Page 28

29 RMB and FCY account type and features Renminbi (RMB) accounts RMB basic account Conduct settlements and make cash transfers Can open only one RMB basic account RMB general account Conduct non-cash settlements Multiple accounts permitted, no withdrawals E.g., use the account for local and provincial taxes RMB special account Manage and use funds for specific purposes within the laws E.g., securities transactions settlement funds RMB temporary account Only for temporary needs Needs to be used within a specified time period Foreign Currency (FCY) accounts FCY settlement account Manage foreign currency operating transactions FCY loan account (local) May apply for domestic foreign currency loans FCY loan repayment account Handle loan principal and interest repayment FCY capital account Manage foreign exchange capital Page 29

30 Banking services in China Treasurers top criteria for bank selection and services Bank selection Bank services Technology Location Features Tools Electronic banking capabilities Ability to execute domestic payments and meet payment timing Ability to handle payments and FX Cash collection, concentration and flexible schemes Branch network in China Expertise of staff on banking in China Global network outside of China Work with local Chinese banks Offer credit RMB clearing centers Opening RMB or offshore CNH account Domestic electronic payments or receipts Domestic check payments or receipts Payment processing and FX Card payments or receipts Collections Electronic reporting Payroll services Trade finance and LCs Specialized services (intercompany lending, cash sweeping schemes) Page 30

31 Technology Page 31

32 Considerations when selecting a TMS or ERP to use in China TMS ERP Continuous trend toward TMS adoption High visibility across the company Host solutions, bank proprietary systems Efficient retrieval of data Both domestic and international providers of TMSs are available in China Audit trail more standardized and manageable Bank account structure Reporting Liquidity management Cash management Financial risk management ERP Cash flow forecasting TMS Customer Page 32

33 Additional thoughts to consider about TMS Does the TMS meet the minimum functionality and accounting requirements in all regions of China where the company conducts business? Is the TMS robust enough for global trade management? Is the TMS s geographic information system continually updated? Can the TMS capture accurate, timely and transparent data? If your company decides to adopt TMS, will it greatly benefit from a TMS vendor or Chinese bank proprietary systems? Page 33

34 Poll 3 Are you planning to integrate China into your global treasury structures in the next five years for liquidity and risk purposes? A. Currently working on changes now B. Plan to work on this next year C. Plan to execute this strategy within five years D. Need further clarification and third-party support E. Do not plan on making changes Page 34

35 RMB risk management Page 35

36 Chinese currency rates Currency background CNY (Chinese yuan, renminbi) Onshore (CNY) Rate set by People s Bank of China (PBOC) Offshore (CNH) Freely floated rate Significant influence by PBOC to stay close to CNY CNY and CNH both have their own separate buy, sell and mid-market rate. Trading band +/ 2% Part of the Special Drawing Right (SDR) Currency Basket Source: Bloomberg (historical rates) Page 36

37 RMB currency risks Monitor the direction of RMB and take steps to mitigate risks Risk management tools Market analysis Decision between CNY and CNH Spread between CNY and CNH Determining the best rate Natural hedges Natural way to reduce exposure Liquidity instruments Efficient way to manage excess cash RMB derivatives Hedging program CNH-denominated foreign exchange risk management tools FX options, forward contracts or non-deliverable forwards (NDFs) to reduce currency fluctuations and minimize the risk of loss Clear accounting guidance One internal booking rate for accounting purposes (CNY, CNH) Avoid internal FX complications Source: Bloomberg (historical rates) Page 37

38 Thoughts, objectives and next steps Page 38

39 Next steps in treasurers journey Develop a Greater China cash management strategy Internationalization of the renminbi (RMB) Hong Kong, Singapore and London (Offshore CNH markets) Tap into China s capital markets Reassessment RMB cash sweeping schemes, hedging program, bank account structure Upcoming challenges High-level action plan Page 39

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