Treasury transformation for globalising Chinese corporates

Transcription

1 Treasury transformation for globalising Chinese corporates

2 Challenges faced by Chinese corporates As the second largest economy in the world, China has become an integral part of the global markets. As a result, Chinese companies are expanding quickly overseas to explore new market opportunities via mergers and acquisitions (M&A) or organic growth. To support further RMB internationalisation, China has also recently released a series of new regulations to promote cross-border trade and capital flows between China and the rest of the world. This favourable regulatory environment has paved the way for Chinese companies to strengthen their global footprint. As Chinese companies expand overseas, they are facing more challenges in terms of international treasury management, such as bank account rationalisation, optimum cash management structures, foreign exchange management, and centralised treasury functions, to name a few. Addressing such challenges requires large Chinese companies to develop a global operating model for the treasury function. This paper discusses the typical structures and practices that support such a global approach to treasury management. This requires companies to transform the way treasury is managed internally. As Chinese companies expand overseas, they are facing more challenges in terms of international treasury management, such as bank account rationalisation, optimum cash management structures, foreign exchange management, and centralised treasury functions. 2

3 Regional treasury centre As the central treasury is unable to provide services to all of a group s subsidiaries located in different time zones, there is often a need to establish one or more regional treasury centres (RTCs) depending on the footprint and time zones covered. The RTC refers to a group s regionally centralised treasury operations unit providing support and services to its business units in the region. The RTC would typically be responsible for a number of core finance and treasury functions, including: Liquidity management: A key responsibility of the RTC is to centrally manage the group s surplus cash in the region by pooling all surplus cash physically or notionally, so that the group s surplus cash can be re-deployed internally to fund cash poor entities. This can result in significant savings in funding costs. Payments and collections: The RTC can drive more efficient payments and collections processes by helping to consolidate these activities into a shared services centre (SSC), or using a payment factory type model where payments from different business units are centralised via the RTC. It could go one step further and deploy a pay-on-behalf-of (POBO) or receive-on-behalf-of (ROBO) model for payments and collections where transactions are processed via central accounts controlled by the RTC. Regardless of the approach used, host-to-host connections are generally implemented between the corporate and its major banks so that payments can be executed on a straight-through-process (STP) basis whilst collections data can be captured and used for reconciliation by the bank s or the corporate s systems. Large corporates often have a significant number of intercompany transactions which need to be settled on a monthly basis. A netting centre will serve to net these intercompany transactions via a multilateral netting solution, whereby each subsidiary only settles on a net basis via the RTC. Netting centre: Large corporates often have a significant number of intercompany transactions which need to be settled on a monthly basis. A netting centre will serve to net these intercompany transactions via a multilateral netting solution, whereby each subsidiary only settles on a net basis via the RTC. Currently most treasury management systems (TMS) or ERP can offer netting centre functionalities. FX centre: Some corporates use the RTC to centralise foreign exchange exposures by ensuring all subsidiaries enter into FX hedges with the RTC, instead of the banks. Consequently, the RTC is able to capture all FX exposures for subsequent netting within the RTC. The RTC will then only transact with its banks for its net positions. Alignment and integration: It may also be aligned and integrated with wider corporate structures such as shared service centres and centralised trading centres (CTC). We are seeing more RTCs working with the SSC and CTC to further generate value via standardised processes and simplified trading relationships. Apart from the above, the RTC also brings additional benefits such as access to local capital markets, potential tax savings, and access to a talent pool with local market knowledge and expertise. Typically the RTC is composed of front office, middle office, and back office functions, with responsibility for deal analysis through execution to settlement and accounting. The chart on the next page illustrates the segregation of duties. 3

4 Segregation of front, middle and back office functions in a RTC Analysis Treasury Management System Decision making Execution Confirmation Controls Reports Front Office Middle Office Settlement Back Office Accounting Middle Office Corporates can choose different degrees of centralisation in terms of functions performed by the group treasury at head office and the RTC, depending on the corporate culture, types of flows and industries in which they operate. Generally, treasury strategy and policy development are centralised at the group treasury level, whereas treasury operations are handled by the RTC. The following chart shows the various options for different types of treasury structures. Function Treasury structure Decentralised Distributed Central In-house bank Policy development Centralised Centralised Centralised Centralised Decision-making responsibility Decentralised Centralised Centralised Centralised Execution Decentralised Decentralised Centralised Centralised Banking Local selection Joint selection Central selection Operating units bank with treasury 4

5 Before setting up an RTC, corporates need to carefully consider whether their current global business structure is set up to derive the full benefits of an RTC. Questions for management Implications Scale Does your business structure consist of multiple subsidiaries? Are these subsidiaries operating across geographies and business lines? Without adequate scale, the corporate may not derive the full benefits of an RTC Regulations Do local regulations impose restrictions on local entities placing surplus funds with an RTC? Regulatory restrictions may negatively impact the feasibility of the RTC Legal Is the RTC allowed to perform functions on behalf of local entities (e.g. FX) or is this restricted by local regulations? Does transaction information need to stored in-country? Legal restrictions may negatively impact feasibility of RTC The costs of implementation may be increased if treasury platforms need to be replicated in-country Taxation What is the legal status of the local entities that will be part of the RTC structure? Are intercompany transfers allowed? This could impact the tax efficiency of financial arrangements agreed between the RTC and local entities Operational What are the geographic locations and time zones of the entities supported by the RTC? Are the account payables and receivables for the local entity settled in local or foreign currency? Does the local entity have the required ERP or system infrastructure to support centralised processing of transactions? Widespread geographic locations will require longer operating hours for the RTC Local currency transactions will require deeper knowledge of local regulations and more extensive support from RTC Extent of common infrastructure can limit opportunity for process centralisation In-house bank In-house bank (IHB) structures are one of the most sophisticated treasury models. It is designed to deliver banking services such as cash management, FX, funding and working capital to business units within an organisation. Such a model means that business units no longer need to source such services from external banks. The organisation can thus enjoy significant savings on funding costs, reduced or eliminated transaction fees, was well as improved operational efficiencies. The IHB model typically includes centralised bank accounts at the IHB level, on-behalf-of processing and internal settlement of intercompany transactions via IHB accounts. How key transactional flows are managed through the IHB model is summarised on the next page. 5

6 Centralised clearing accounts In-house bank accounts On-behalf-of execution Ideally, the IHB opens a single account in each currency with an external bank to process payments, collections and other settlements for the group Transactions are executed by IHB through centralised clearing accounts on behalf of business units Business units open an internal bank account with the IHB instead of external bank Transactions generated by business units are recorded on their internal IHB account Includes payments, collections, FX, deposits and intercompany loans Payments/collections: The IHB functions as a payment/collection factory, executing payment and collections transaction on an on-behalf-of basis FX netting: Trades aggregated, netted and executed on net basis with external banks Intercompany payables/receivables: Can be settled on a gross basis by the IHB or a net basis as part of a netting centre Intercompany lending: IHB manages all cash positions on behalf of business units The IHB model is a very effective way of simplifying account structures and consolidating liquidity as all cash positions are automatically concentrated in a single operating account for each currency without the need to operate separate pooling structures. It differs from netting in that the IHB is also used for settling external payments and collections with third parties, not just intercompany payments. However, moving to this structure means that treasury may need to provide internal bank statements to participating entities since they will no longer have separate operating bank accounts in their own name (other than specific bank accounts required by local regulations). In order to achieve this, payment and collection transactions need to be mapped to individual entities within the treasury management system (TMS) in order to produce statements which show each entity s daily transactions and balances. This same information is also used to track the resulting intercompany loan positions generated by these transactions in the financial accounts. In addition, corporates contemplating implementing an IHB need to have a good understanding of the different regulatory environments in which they operate. For example, POBO and ROBO may not be allowed in a number of countries, so the IHB model cannot be fully leveraged in these scenarios. Under such circumstances, a customised hybrid treasury model is required whereby the IHB is authorised to operate the participating entities bank accounts for payments and collections. Finance company China s Finance Company (FC) license is very similar to an IHB where the FC is allowed to centralise group liquidity, settle intercompany transactions, take deposits and grant intercompany loans to group entities. The FC is regulated as a non-bank financial institution as the license is issued by the China Banking Regulatory Commission (the CBRC). Generally, the license only allows the FC to conduct business in China. However, there are a few Chinese corporates which have obtained the CBRC approval to set up offshore subsidiaries. 6

7 For Chinese corporates expanding overseas who are contemplating setting up a regional treasury centre with an in-house bank model, one of the key considerations is whether they should apply for an offshore license of their current FC. Some of the key benefits of this approach are: Current treasury processes can be re-deployed to overseas markets, which makes it easier for a company to quickly roll out treasury management to overseas subsidiaries. The FC s existing ERP and treasury management system can be used overseas without significant re-design and re-configuration. Accounting and reporting will follow the existing processes, making the FC the single worldwide treasury management execution vehicle. This makes it easier to track its performance. Having said that, leveraging the overseas FC license also brings some difficulties: The application process to the CBRC for the overseas license could be lengthy. Since it will be operating under a license granted by CBRC, the overseas FC subsidiary will have to comply with both the CBRC and international regulations and reporting requirements. As a result, it will not be able to fully benefit from the more flexible regulatory environment offered in some overseas markets. The performance of the FC is normally managed as a profit centre, whereas an RTC is very often operated as a cost centre. Therefore, aligning the performance management metrics of the FC with broader treasury goals such as reducing costs to business units could be problematic. Tax benefits are important considerations in setting up an RTC. To be able to capture the full tax benefits, the RTC will need to satisfy a number of pre-requisites set by the RTC s country of domicile. A FC subsidiary may not enjoy the same flexibilities compared to a corporate entity registered overseas purely for RTC purposes. Thus, a careful analysis of the pros and cons of establishing an overseas FC subsidiary should be considered a mandatory part of any RTC evaluation. 7

8 Trading relationships in a centralised trading model Trading centre With the rapid expansion of Chinese corporates in the global markets, trading relationships are getting more complicated with manufacturing and trading entities all around the world. Consequently, these multilateral intercompany trading relationships translate into inefficient treasury processes and increased transactional costs. Recently, trading centre (TC) models have been increasingly used by corporates to simplify these trading relationships. These models are primarily designed to address a wide range of issues across the entire supply chain. Again the focus remains on centralisation and the benefits that accrue from minimising process duplication, maximising business coordination, and leveraging size for cost efficiencies. Such structures also seek to optimise margin allocation between suppliers, the trading centre and buying entities, drive better use of working capital and more effectively manage financial exposures, specifically those relating to FX. The diagram below illustrates the centralised trading flows: Manufacturing Co Country 1 Sales & Marketing Co Country 1 Local & International Supplier Manufacturing Co Country 2 Manufacturing Co Country 3 Centralised Trading Centre Sales & Marketing Co Country 2 Sales & Marketing Co Country 3 Local & International Customers Manufacturing Co Country 4 Sales & Marketing Co Country 4 Buy/Sell relationship As the above diagram shows, the trading centre becomes an ideal platform for optimising working capital, FX and liquidity management. Optimising working capital: Since significant payable and receivable flows are centralised at the TC level, flexible trading terms (leading and lagging) can be applied to different subsidiaries depending on whether they are in cash rich or cash poor positions, thereby providing working capital funding to subsidiaries. A significant advantage of this model compared to a cash pool is that there is no trapped cash issue. Centralising and netting FX exposure: The TC can take all FX risks by billing and paying in local currencies wherever allowed. Therefore, all other subsidiaries no longer need to hedge their FX risks separately. The TC will centralise all FX exposures and net opposite positions before transacting the net position with external banks. Centralising liquidity management: A significant portion of surplus cash and profits is captured when liquidity management is centralised in the TC. 8 Simplifying processes: This translates into cost reductions in terms of AP/AR processing. Consolidation and streamlining of intercompany AP/AR processing including netting of two-way intercompany flows between business units can further enhance efficiency.

9 While trading centres bring many benefits, caution should be exercised in terms of transfer pricing. With the development of the Base Erosion and Profit Shifting initiatives (BEPS), intra-group financial transactions will come under increased scrutiny by the local tax authorities. Therefore, transfer pricing rules need to be carefully designed and documented to make sure the profits are allocated fairly in the value chain, and the leading and lagging rules fully comply with local regulatory requirements. Shared service centres With the rapid development of technological applications in the corporate space, automation and process standardisation have enabled the fast growth of shared service centres (SSCs) to further enhance operational efficiencies and cut costs. To date, SSCs have been widely applied to various corporate functions, including finance and accounting, treasury, and IT. The following table sets out the typical corporate functions managed by SSCs. Order to cash Purchase to payment Record to report Employee services Information systems Order entry Billing Accounts receivable Customer services Logistics Strategic vendor management Contract administration Procurement Fixed assets Accounts payable General ledger General accounting Consolidation Reconciliation Reporting and analysis Treasury Cash management Payroll HR management Relocation Benefits administration Pensions Travel management Travel and expenses Data storage Data management System upgrades and maintenance PC support Help desks/ user support Application and network support Risk management Training Tax services Internal audit Location-wise, China has recently become a choice location for SSCs, thanks to its highly efficient infrastructure, deep talent pool, and reasonable running costs. Therefore, for Chinese corporates expanding overseas, one of the ideal SSC locations is China. We are seeing a number of Chinese companies setting up their global SSCs in their China Headquarters, or in a midwest metropolis such as Chengdu, Chongqing, or Wuhan. If the Chinese corporate prefers to situate its SSC outside of China, there are a number of good alternative locations they could consider such as Malaysia or the Philippines in Asia; Hungary, Romania or the Czech Republic in Europe; or the US, Costa Rica, Panama and Brazil in the Americas. Some considerations to be taken into account when selecting the best place to situate an SSC include the geographic location of the business, required language support, business and tax incentives, IT infrastructure, proximity to key market and clients, and the regulatory environment. 9

10 To move to a SSC model, corporates typically need to go through the following stages to standardise and re-engineer their existing processes: STAGE 01 STAGE 02 STAGE 03 STAGE 04 Consolidate processes Identify all the processes that will move to the SSC Eliminate duplications between subsidiaries Distribute the consolidated workload evenly throughout the month so that the SSC has a sufficient and smooth workload on a daily basis. Standardise processes Standardise all the policies and business rules Minimise and optimise the IT systems to be used in the SSC Adopt Best Practices Re-engineer processes Organise around end-to-end processes Re-engineer the new organisation and the standard operating processes Reduce process complexity Automate processes Reduce or eliminate manual handling Integrate different systems across the enterprise Reduce paper flows For a SSC to realise these benefits, it is important that companies are able to integrate their own ERP systems with their banks systems so as to maximise straight through processing and automation. Direct host-to-host connectivity is the most common model where payment files are directly sent to the bank by using industry standard formats like ISO XML or company specific formats. Another connectivity alternative is via SWIFTNet if the SSC is dealing with multiple banks. Reconciliation can also be automated by leveraging the information received: Bank account reconciliation based on statement feeds Payables reconciliation based on the positive or negative confirmation of payments Receivables reconciliation based on matching outstanding invoices to clearing data Conclusion As Chinese companies become more integrated with the global economy, it is time to re-think their global treasury strategy in order to navigate more sophisticated markets and challenges. It is increasingly important that companies work with their banks on the design and implementation of advanced treasury models needed to support them becoming global players. For more information, please contact TreasurySolutions@sc.com 10

11 Philippe Tian Treasury Solutions, Transaction Banking Philippe Tian is based in Shanghai, China and is a senior treasury adviser within Standard Chartered Bank s specialised Treasury Solutions unit. He is an experienced treasury practitioner having worked in senior treasury roles in GE, Philips and Saint Gobain before joining PWC as a treasury consultant. Over the past two years he has been advising leading Chinese corporations on treasury best practices including development of their global treasury structures and practices. This material has been prepared by Standard Chartered Bank (SCB), a firm authorised by the United Kingdom s Prudential Regulation Authority and regulated by the United Kingdom s Financial Conduct Authority and Prudential Regulation Authority. It is not independent research material. This material has been produced for information and discussion purposes only and does not constitute advice or an invitation or recommendation to enter into any transaction. Some of the information appearing herein may have been obtained from public sources and while SCB believes such information to be reliable, it has not been independently verified by SCB. Information contained herein is subject to change without notice. Any opinions or views of third parties expressed in this material are those of the third parties identified, and not of SCB or its affiliates. While all reasonable care has been taken in preparing this material, SCB and its affiliates make no representation or warranty as to its accuracy or completeness, and no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. SCB and its affiliates expressly disclaim any liability and responsibility for any damage or losses you may suffer from your use of or reliance on this material. SCB would be pleased to consult with you regarding the bank s cash management capabilities and Treasury Solutions. In any consultation, SCB does not provide accounting, legal, regulatory, tax or investment advice or treasury management advisory services. Any statements regarding those matters would be for discussion purposes only. No such statements, nor any forecasts, modelling or other projections, should be relied on by you. SCB or its affiliates may not have the necessary licenses to provide services or offer products in all countries or such provision of services or offering of products may be subject to the regulatory requirements of each jurisdiction. This material is not for distribution to any person to which, or any jurisdiction in which, its distribution would be prohibited. You may wish to refer to the incorporation details of Standard Chartered PLC, Standard Chartered Bank and their subsidiaries at Copyright 2015 Standard Chartered Bank. All rights reserved. All copyrights subsisting and arising out of these materials belong to Standard Chartered Bank and may not be reproduced, distributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written consent of Standard Chartered Bank.

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