Managing risk through treasury centres

Transcription

1 Managing risk through treasury centres Reprinted from The Corporate Treasurer, April / May 2016 CorporateTreasurer

2 TREASURY CENTRE FORUM PARTICIPANTS Enoch Fung Head of market development, HKMA Allen Leung Treasurer, Cofco (Hong Kong) Terry Chan CFO, Fufeng Group Sanjeev Chatrath Managing director and region head, Asia financial and risk, Thomson Reuters Francis Ho Director of treasury, CLP Tim Wong Group treasurer, Chevalier International Holdings MODERATOR Daniel Flatt Editor, The Corporate Treasurer Managing risk through treasury centres 1 REPRINTED BY CORPORATE TREASURER APRIL / MAY 2016 A s companies look to expand their businesses across borders, the ability to finance and manage the risks that come with entering into new markets should be a top priority. Even with China s going out strategy in play, many Chinese companies do not have treasury policies in place or know whether their existing ones are fit for purpose. Likewise, global companies looking to move into Asia are not always prepared for the plethora of different regulations and nuances within the region. The Corporate Treasurer, with Thomson Reuters, set about providing some insight into why operating centres for international businesses are so important. THECORPORATETREASURER.COM THE CORPORATE TREASURER: Hong Kong announced a new initiative to attract companies to set up treasury centres. Enoch, can you update us on where the government stands on the proposals, please? ENOCH FUNG: The financial secretary, John Tsang, last year announced that in order to promote Hong Kong as a corporate treasury centre the government would, firstly, allow a corporate to borrow from overseas associated corporates and have their interest expense deductible under certain conditions. Secondly, corporates who are setting up dedicated treasury companies in Hong Kong would receive an incentive tax rate of 8.25%. For companies considering getting the THECORPORATETREASURER.COM additional half rate incentive scheme, one of the requirements is to have a separate legal entity with a dedicated function of doing corporate treasury activities. The government has proposed a company would still be eligible for the half rate so long as your corporate treasury has a percentage of total corporate and your corporate treasury related assets worth 75% of that entire entity. We are going through the legislative process with the hope of getting the bill passed by the end of summer of this year THE CORPORATE TREASURER : Allen, given Cofco (Hong Kong) s treasury resides in Hong Kong, what are your thoughts on the proposals? ALLEN LEUNG: In my previous role as a regional treasurer for an MNC [PPG Industries], we made use of the Hong Kong treasury centre as a sort of internal bank so we could mobilise funding in the region. For example, we would get the funds from Singapore to Hong Kong and re-lend to Malaysia, Australia, and Thailand. For my present role at Cofco (Hong Kong), Hong Kong is a platform for a state-owned entity [SOE] for investing in overseas. Apart from the investment platform, Cofco Hong Kong can act as a funding vehicle. We have an A-rating, so with this [new] policy in place, it will only strengthen Hong Kong as a platform for SOEs overseas investment. REPRINTED BY CORPORATE TREASURER APRIL / MAY

3 TREASURY CENTRE FORUM THE CORPORATE TREASURER: Why is Hong Kong the preference for Cofco, however? Other jurisdictions have offered good incentives for quite some time. ALLEN LEUNG: It is closer to China and we understand the culture, and also we have a long history of doing business through Hong Kong. It is a kind of trading post and then, with extension, we grow and now we make use of Hong Kong as a platform for business. TERRY CHAN: Hong Kong in the past has been a very important capital raising centre for our company. But in the last 12 months, because of the major currency movements, I think that role is deteriorating a little bit. Broadly, we are very keen, given the continual liberalisation of the renminbi, to manage our cash better, produce cost savings for the group, and also to potentially create additional value in cost for investment. TIM WONG: My company is a local-run business based in Hong Kong. All our management is in Hong Kong, so our treasury centre is also here. I think the policy can help these kinds of local Hong Kong businesses to really look into the treasury set up. In the past, we did not put resources into looking into the setting up of a centralised entity to handle all treasury functions. We do not have a special vehicle to act as an in-house bank, for example, and we will use lots of different entities to enter into specific transactions. I think that the new policy adds some incentive for us to look into this area. FRANCIS HO: CLP is a company that has investments in the region, including Australia, China, India and Southeast Asia. Our company has its own legacy, organisational structure, business spectrum etc,. So whether they can ride on Terry Chang, Fufeng Group Sanjeev Chatrath, Thomson Reuters the benefit of this corporate treasury centre incentive depends on how they can move from their original organisation structure to include the government s requirements to qualify for the concessionary tax regime. That means they probably would need to further consolidate the treasury activities, which have usually been in the regional department under a head office operation to a separate legal entity. They also would need to come up with an arrangement, like setting up of service agreements, with various entities so they can have more designated clear-cut obligations and cost allocations around the globe. And probably they need to also move from the conventional thinking of a core centre, which treasury professionals always perform in their role, to have a profit plus core centre so they can have a more attainable, quantifiable amount to benefit from the tax concession. SANJEEV CHATRATH: I think what HKMA is doing right now is enabling those corporates who think Hong Kong is strategic to them, to really put their treasury and finance roots deeper in the country. Hong Kong is a gateway into China and has over the past many years developed further as a treasury centre. The capital markets are well developed, currency movement is free, infrastructure is good, and liquidity pools are deep. All of these become very beneficial to treasury centres that are looking to hedge, pool cash or put their surplus cash to work. ENOCH FUNG: To give you some numbers we ve got 7,500 companies who actually have their headquarters or regional offices in Hong Kong. We are also the largest offshore renminbi business sector with more than 220 banks who are capable of full renminbi services for lending as well as other services. Many of the capital markets desks for the banks are headquartered here in Hong Kong. More than 60 of the top 100 global money managers have a presence in Hong Kong. We have identified the tax issue and we are working on it, but at the same time we also see this undercurrent where the Western corporates are coming into Asia and Chinese corporates are using Hong Kong as a gateway for either the One-belt, One road region or globally. TERRY CHAN: When we consider the position of where to manage our treasury function it s usually natural for us to compare Hong Kong versus Shanghai, [and] particularly the free-trade zones, such as the Shenzhen region. And often we hear from the bankers that whatever you can do in Hong Kong, you can also do in these places. And so, the question comes down to the total cost of operating. It s not just that extra tax incentive. It s about the ease of language and understanding of all the law that is being used and obviously for us, most of our staff are based in China, and they use Chinese. It s a friendlier environment. THE CORPORATE TREASURER: Can you clarify what you mean by friendlier? TERRY CHAN: It s about talking to practitioners who can communicate in the same language. And also, you need to have comfort in knowing what laws are really requesting of you. For example, as Hong Kong policy documents or regulatory documents are drafted in English, the translation becomes extremely difficult to understand. What we often find is that a lot of the foreign operations documents of regulations stipulated by the Hong Kong regulators are usually written up in English, but then when they get translated into Chinese it gets extremely difficult to understand. We then have to wait until the commercial bankers have digested these and then they come up with more easily understood materials. ENOCH FUNG: But, I just think that that s from a corporate perspective. But there are enough legal experts and also tax advisors who are equally familiar with the jurisdictions of both sides that can help you to navigate through them, and that s the part where I think that the talent and the experts availability is important in terms of how can we navigate through them. SANJEEV CHATRATH : And if you ve got most of your business in China, perhaps there is good reason in making Shanghai the location. But if you ve got other strategic interests in Hong Kong that are relevant to you, then that becomes attractive. And that I think is at the heart of it, because more and more companies are focusing on whether they already have a core presence on the ground. Or is this going to be an outlier where you have to put your management, and technology It s natural for us to compare Hong Kong versus Shanghai, [and] particularly the free-trade zones infrastructure from scratch, which is a much bigger and expensive undertaking. ALLEN LEUNG: It is probably an evolution process, because there must be multiple reasons for your company, for your team, to move out of China and extend your business opportunities, and indeed that s the process that we all need to go for. The Allen Leung, COFCO (Hong Kong) good thing about that is, as treasurers, for example, we can also participate in the process and learn from the different languages, cultures and jurisdictions so that we can look to find the most optimal way to do cash pooling, funding, etc. TIM WONG: So for us our primary office is in Hong Kong, but we also have extensive operations in China. I think Hong Kong still has the advantage in terms of the clarity of contracts and multiple treasury related activities. I think Hong Kong is still more professional and a very important place to operate a treasury hub. SANJEEV CHATRATH: It s not uncommon to see companies that just focus on China with domestic treasury centres there. If a company has a very deep presence in Asia, it may have multiple treasury centres in Asia that pool to one main location for purposes of better liquidity management, for example. It is also not uncommon to see some corporates, whether local or global, operate centres within China and also operate an international centre. THE CORPORATE TREASURER: If you re a Chinese corporation extending operations beyond China, you need to be prepared to open up new banking relationships. How do you do that? 3 REPRINTED BY CORPORATE TREASURER APRIL / MAY 2016 THECORPORATETREASURER.COM THECORPORATETREASURER.COM REPRINTED BY CORPORATE TREASURER APRIL / MAY

4 TREASURY CENTRE FORUM FRANCIS HO: I think this is a process that works in all directions. A business will obviously need to bring in broader banking and business counterparts to support the operation and to grow. It is important to diversify the funding/ lending relationship and tap into more business opportunities. It is also to ensure goals are aligned and that counterparties share the same values to ensure a longterm stable relationship. Banks also need to see the benefits of extending their relationship in terms of cross-functional business transactions. THE CORPORATE TREASURER: Given China s economic slowdown, is now the right time to be thinking about setting up international operations? ENOCH FUNG: I think the economy is slowing, yes. And it s fair, because China is undergoing quite a lot of reforms [moving to a market-based economy]. At the same time companies are adjusting their corporate structures, capital markets are also undergoing reforms, there are regulatory reforms. At the same time, China is steadily progressing with liberalisation of the renminbi. But, overall, I think the commitment is there, I think the progress has been steady over the years, and I think It is beneficial for Hong Kong as China chooses to open up greater access to its capital market with Hong Kong as a gateway. Enoch Fung, Hong Kong Monetary Authority ALLEN LEUNG: When you look at the level of investment overseas, from the perspective of either an SOE or a private Chinese company, it s a trend that will continue. I would say, for some corporations, they will focus on the shortterm horizon. I mean, if you look at the more strategic perspective, the goal for Chinese companies to go out is still in play. For example, Cofco acquired two companies in 2014: Dutch grain trader Nadira and also the agri-business from Noble Group. So, from that perspective we continue to extend overseas. THE CORPORATE TREASURER: That raises an interesting thought. From a treasury perspective how do you handle merging businesses? ALLEN LEUNG: When I was in PPG, from the MNC perspective we would already have well-defined processes in place and strong corporate teams in place. We needed to make sure the newly acquired company would be integrated from a corporate perspective, from a tax and treasury perspective. So we can make sure the system is connected between both Tim Wong, Chevalier companies. The people: we need to find out how experienced they are. We need to establish whether they need support, or if we need new people or to transfer people to the new company. So, we have a team that will look manage the operations and ensure we integrate the companies over an agreed timeline. THE CORPORATE TREASURER: What about setting up a treasury policy for a merged company? ALLEN LEUNG: My previous employers already have well-defined processes and strong corporate and business teams in place. We needed to make sure the newly acquired company would be integrated from the business and corporate perspective. For example, we would make sure the system is connected between both companies. The people: we need to find out how experienced they are. We need to establish whether they need support, or if we need new people or to transfer people to the new company. So, we need to have a team that will oversee the operations and ensure we integrate the companies over an agreed timeline. THE CORPORATE TREASURER: It boils down to knowing what you want your treasury centre to do. TIM WONG: Treasury is a cost centre but we can add value if we get creative. I think we need to be more proactive in a lowinterest-rate environment and enhance the yield of our cash holding. In the past we could simply place our cash on deposit, but we need to explain the rationale and obtain the management approval if we invest in other products corporate bonds, or liquidity products. It can enhance our yield a lot, of course. On the financing side, we can also borrow in Hong Kong and use the funds to finance operations in mainland China. This creates sensible cost savings. We do have a treasury policy in our group. In the past we may not have thought about hedging renminbi exposure due to the continued appreciation trend and the cost of the hedging, for example. However the volatility of the market require us to act proactively and quickly. When we hedged renminbi about two months ago, it cost 5% but [very recently] it only cost 2%. The market doesn t allow you to wait for your treasury policy to be updated. We may not update treasury policy regularly but now we have very regular meetings and once we think there s a good opportunity to do some hedging, we can be more proactive in making these decisions. THE CORPORATE TREASURER: What should underpin a good treasury policy? SANJEEV CHATRATH: The underlying principle is the fact that cash is a corporate asset. Once there is an alignment on that, treasury policies become easier to set up. It is important to think about setting up common standards and common processes. There are [a few] specific examples that come to my mind in terms of tools and technologies that are available nowadays that help in this process. A good example is foreign exchange. More companies are focused on having one bank-agnostic platform for execution and discovery of price. As an example, in August, during volatility in renminbi, we saw on our FX platforms trading volumes go up 600% within a day. When there is uncertainty there is a flight to quality and people want a multi-agnostic platform to ensure they have enough liquidity. A second example is the greater emphasis on the ability to benchmark.... Are you borrowing at the right rates, how do they compare against similar-rated instruments in the market and again we ve got a range of tools where we can capture more than a million basic instruments, both from the pricing point of view and also for the treasurers to be able to the benchmark their transactions. A third example ties to the huge number of regulatory changes that are happening. As opposed to relying on your friendly banker telling you about the change and then try to sell you stuff, more and more treasurers are actually implementing tools which they can use to gain insights about these regulatory updates. A fourth point applies to KYC [know your customer]. It is the elephant in the room in most of the treasury operations given the amount of work effort involved just to open a bank account can be very labour intensive and there is a lot of risk involved in that process. We are seeing growing adoption of our solutions to facilitate onboarding as well as for solutions to improve due diligence on your supply chain partners, for example, so that you can be more pre-emptive before it starts placing pressure on your business. FRANCIS HO: That s a very important point. When we talk about the regulation and compliance, I think banks have significantly more consultants and time to handle this. For us, because of KYC, there is a huge operational burden. Banks need to check a host of business-related details such as operating licences, ID cards, etc. The banks really want to be sure they are working with the right customer. THE CORPORATE TREASURER: I believe this is driving corporate treasury departments to look at their own supply chains in far greater depth, also. SANJEEV CHATRATH: Exactly, and then, that s where I think technology is the friend. We see more and more corporates focus on how do I get common standards so they re really no longer dependent on a single bank. More and more treasurers want to be build up a healthy treasury where they are not shackled to a single provider, and leverage a global platform that is open and trusted. You can pretty much operate the same platform whether you are operating in China or Brazil. This is the same with due diligence, or with regulatory intelligence. Francis Ho, CLP 5 REPRINTED BY CORPORATE TREASURER APRIL / MAY 2016 THECORPORATETREASURER.COM THECORPORATETREASURER.COM REPRINTED BY CORPORATE TREASURER APRIL / MAY

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