the 2012 euromoney guide to china cash management guide to china … · cash management services...

The 2012 Euromoney Guide to

China Cash ManagementJu

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Foreword 2The vast opportunity in meeting clients’ cash management needs

Introduction: a challenge and an opportunity 5

Chapter 1: Client needs: cash management services 6

Chapter 2: RMB internationalization: right direction, uncertain timing 9

Chapter 3: Opportunities from Chinese corporatesgoing overseas and internationals expanding in China 12

Chapter 4: Finding a trusted partner: Partner banking 15

Chapter 5: Innovation in technology and multimedia 20

Chapter 6: Financial supply chain management 22

Chapter 7: SMEs: driving the future 24

This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.

Euromoney Institutional Investor PLCNestor HousePlayhouse YardLondon EC4V 5EXTelephone: +44 20 7779 8888Facsimile: +44 20 7779 8739 / 8345

Chairman and editor-in-chief: Padraic FallonDirectors: Sir Patrick Sergeant, The Viscount Rothermere, Richard Ensor (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Diane Alfano, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany

Editor: Philip AyersHead of China: Lily Zhu Printed in the United Kingdom by: Wyndeham Roche, UK

© Euromoney Institutional Investor PLC London 2012 Euromoney is registered as a trademark in the United States and the United Kingdom.

Contents


The vast opportunity in meeting clients’ cash management needs

Bank of China has made a priority of cash management. It makes great sense to do so, for two reasons: firstly, because the growing sophistication of the client base in China and internationally brings with it a greater need for top-tier cash management services; and secondly, because it is extremely healthy for a bank to have a leading cash management business.

“Through this business, we can get more corporate clients, and more low-cost deposits, which are very crucial to the development of the bank,” explains Lin Hong, director, corporate banking unit, at Bank of China. “Our top management is paying very close attention to the business and giving us great support in finance and personnel for further expansion.”

Bank of China established a dedicated cash management business in 2009. Prior to that, it had offered cash management services through several departments. The establishment of a dedicated division was an important step reflecting how important cash management is both to clients and the bank itself. “This is a full-time department focusing on cash management business,” Lin says. Two teams in head office are devoted to the business, as well as nearly 50 staff in IT in charge of developing the global cash management system (GCMS), while many staff with the head office’s guidance do business in its branches and offices domestically and overseas. The bank has paid close attention to the training of a team with cash management expertise. Since 2010, there have been four Certified Treasury Professional (CTP) training courses organized for cash management work related staff. Over 80% have passed the CTP certification test, and been awarded the CTP certificate by the Association for Financial Professionals (AFP).

Building the businessBank of China has set about building this business in several areas. The first has been to devote more resources to research and development around GCMS. The investment in this area alone has increased sharply since 2009. “R&D is a key part of the cash management platform for the bank,” Lin says.

The second is the way that the new dedicated cash management business has been organized to introduce its systems and platform to the market. “We show how our platform and product satisfies our clients’ requirements, enabling them to centralize their fund management, and to lower their relative costs,” Lin says. “We have almost 2,000 group clients using our GCMS and they are very satisfied with our services and products.”

Also, as part of this marketing drive, Bank of China has pushed its brand, which is dedicated to the cash management business. “Our public relations department has given us great support in this brand building,” Lin says. And the bank routinely participates in conferences, debates and roundtables – such as the one featured in the May edition of Euromoney magazine – to improve local and international understanding of cash management processes in China.

Additionally, Bank of China has prioritized internal control arrangements in the business to ensure that its service offerings are fully compliant with best practice. “We attach great importance to the establishment of internal control arrangements,” Lin says.

A growing marketWith these initiatives in place, Bank of China is ideally set up to take advantage of one of the most important trends in Chinese financial services: the growing cash needs of its client base. Although China’s growth rate has slowed, a rate of 8% appears sustainable for at least five years ahead – and that rate is far higher than almost any other developed or emerging nation of note. So there is ample growth in China to support the expansion of its established and new corporations. At the same time, China is undergoing a systemic restructuring of its economy, shifting from an export-led to a domestic demand-fuelled model. This all means change – and changing client demands.

“Some companies will disappear, some will become bigger and bigger,” says Lin. “During this process, lots of group corporations will be newly set up. And besides their human resources control and their decision-making power, they also need to control and centralize their funds management. They want to know as quickly as possible what is happening in their revenue and their business processes.” So the structural changes in the Chinese economy, while difficult to navigate for some corporations, actually create a great business opportunity for institutions like Bank of China – which can, in turn, help corporate clients turn this economic transformation to their advantage.

What do clients need? “They need to centralize their inflows and outflows of cash,” Lin explains. “They also want to know accurately, timely and wholly the relevant information about every transaction.” They also want to fairly allocate accrued internal interest, he says. “If you take one member’s funds to cover another member’s position, you have to allocate the interest fairly,” he says.

Signing ceremony: Bank of China with China Wuyi Co., Ltd


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“Our top management is paying very close attention to the business and giving us great support in finance and personnel for further expansion”

The opportunity for Bank of China to grow in this area is enormous. As one of the largest banks in China, it has over 2 million corporate clients in its corporate banking business. More and more of these will need dedicated cash management services – and the smaller companies represent the

future. “We need to supply this cash management business to our medium and small enterprises,” Lin says. Credit is in short supply for most of these companies, so cash management becomes particularly important. “We can help SMEs by accelerating their cashflow, through collecting their revenue efficiently and accurately,” says Lin. “Companies can optimize their inventory and accounts receivable. It’s very important for a big bank like ours to provide good service in cash management to SMEs.”

This, Lin says, is socially important as well as being beneficial to Bank of China’s shareholders, as it supports the next generation of corporate growth in China. “We can serve the people, serve society, and make profits through doing so,” he says. Better still, today’s SMEs are tomorrow’s corporate blue chips. “If they grow smoothly, and become bigger and bigger, we can develop with them together.”

Supply chain opportunityBank of China is also well placed to meet the growing needs for trade finance and financial supply chain management, both of which are increasingly meshed with cash management. “This solves the financial requirements of core enterprises and their upstream and downstream businesses and partners,” Lin says. Bank of China can discount bills, offer factoring products, issue letters of credit, and do so up and down the supply chain, applying the creditworthiness of the parent or core enterprise to other businesses within the chain. This is big business, and

getting bigger. “In Bank of China, trade finance and supply chain finance is one of our main products we provide to the market,” Lin says. Bank of China also stands apart from the competition by being an international bank, and is therefore well placed for cross-border business as the RMB

becomes more and more international. “In recent years the process of RMB internationalization has become faster, and we think it will have more development in the future,” says Lin. “As the most internationalized bank in China, we have the business experience, the professional human resources and the international settlement products to deal with RMB settlement business.” Bank of China is believed to have the largest ratio of overseas business among Chinese banks.

Correspondingly, Bank of China is increasingly well recognized in international magazine surveys. In Euromoney’s cash management survey, Bank of China was ranked sixth Asia-wide, despite being a largely China-based business; it was the only Chinese bank to appear in the top 10 alongside the multinationals. It was also the highest ranked Chinese bank in the China category.

The combination of a growing and more international economy, a liberalizing currency, an increasingly sophisticated client base, and the potential represented by both group clients and SMEs, means this is an exciting time to be a leader in cash management in China. “We are very confidence about this business,” Lin says. “We are hopeful about the development of the cash management business, and believe our clients’ requirements offer great potential. China’s economy will continue to grow rapidly, and we are very positive about the future of our bank’s cash management business.”

Advantages of BOC global cash management network

Global Service NetworkCross-border cash management is to provide multinational enterprises with global cash management services via BOC’s branch offices in 31 countries and regions and more than 1,500 correspondent banks


A challenge and an opportunity


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Introduction: a challenge and an opportunity

China represents the world’s most vibrant market for cash management services. Not only is it one of the world’s fastest-growing economies, with a steadily increasing share of global cross-border trade, but it is also going through a period of regulatory transformation that represents both a challenge and an opportunity for companies and their bankers.

Although China’s growth rate has slowed, a rate of 8% appears sustainable for at least five years ahead – and that rate is far higher than almost any other developed or emerging nation of note. So there is ample growth in China to support the expansion of its established and new corporations. At the same time, China is undergoing a systemic restructuring of its economy, shifting from an export-led to a domestic demand-fuelled model. And alongside this shift, the currency is being gradually liberalized, with progressively bigger concessions towards settlement of cross-border trade and capital market flows.

This all means change – and changing client demands. “Some companies will disappear, some will become bigger and bigger,” says Lin Hong, director, corporate banking unit at Bank of China. “During this process, lots of group corporations will be newly set up. They will need to control and centralize their cash management. They will want to know as quickly as possible what is happening with their revenue.” And as they grow, they will increasingly venture cross-border, bringing a host of other needs from foreign exchange to risk management.

At the same time, multinational companies are entering a new phase in China. Many have been successfully active in China for several years now, and have moved from an initial period of heavy investment to one in which they are generating cash surpluses that need to be managed. This brings opportunities for banks that can advise on liquidity management and investment products for short-term cash flows. Where multinationals are growing, they typically are heading west into less well-trodden parts of China, bringing requirements for local advice, for integration and for pooling.

Sophisticated client baseBanks in China are attracted to cash management business for several reasons. One is that the sophistication of the client base makes it a necessity: as local companies become more mature, and as international companies become more entrenched in China, they have a greater need

for the efficiencies and practical benefits cash management can provide.

On top of that, a cash management relationship tends to be a loyal and secure one that can lead to many other areas of business. “Through this business, we can get more corporate clients, and more low-cost deposits, which are very crucial to the development of the bank,” says Lin. “Our top management is paying very close attention to the business.” But to meet these needs, banks must evolve quickly to give clients what they need. China’s biggest banks have spent hundreds of millions of RMB on research and development, building electronic platforms, educating staff and establishing new business units to meet the need. China’s major enterprises tend to have a large – and growing – number of subsidiaries nationwide and increasingly internationally, each of them at a different stage of development; one challenge for any cash management bank in China is to meet this diffuse need, across all the locations in which these subsidiaries operate.

International attentionFor international banks, China represents a steadily greater opportunity. China has come to represent such a large proportion of revenue for many multinational companies that several have started to set up shared service centres and even regional treasury operations in China, despite the restrictions on flows of funds. The movement of Chinese companies into foreign territories represents a huge target market for foreign banks, while the development of offshore RMB has also given them a new way in to the market. There is a huge amount of advice and service required from clients trying to fit China into a global enterprise: regulatory change, currency rules, integration of systems, development of technology, pooling of funds, supply chain management.

This last is becoming increasingly crucial by the day: since China is now the world’s biggest exporter, it stands to reason that it is a supplier to a huge number of multinational business enterprises. Ensuring the health of that supply chain is vital for those multinationals to avoid disruption to their business.

This guide looks in detail at the many issues vital to cash management in this swiftly evolving field, comparing the experiences and attitudes of China’s big five banks with the five largest foreign institutions that offer cash management in the country.

As local companies mature, and as international companies become more entrenched in China, they all have a greater need for the efficiencies and practical benefits cash management can provide. Banks must evolve quickly to give clients what they need

“Through this business, we can get more corporate clients, and more low-cost deposits, which are very crucial to the development of the bank”


Chapter 1: Client needs: cash management servicesIn a changing China, client needs – both local and multinational – are changing too

Qi at ICBC says that “one big change in cash management is from our customers. There are a lot of Chinese companies which are growing very fast, from small enterprises to become big groups. Their businesses are covering more areas, and not just focusing on one now, particularly some big groups. As they grow up, they come back to the bank and hope we can provide them a more comprehensive service.” Where once, clients just wanted to transfer money and get easy information from their accounts, “now they want us to provide services to manage their liquidity. Following the requirement, the bank can now help them centralize their money from different locations,and can also provide some risk products,” so as to control variables such as interest rate risk.

Where, once, clients just wanted to transfer money and get easy information from their accounts, “now they also want us to provide services to manage their liquidity,” Qi says. They want their cash to be centralized; they want risk management products; and increasingly they want help on going overseas.

Change has come not just with growth and progress, but with market adversity too. “The basic elements of cash management are still the same: first optimize liquidity and funding; second, visibility and control; third, extending DPO [days payable outstanding]; and fourth, shortening the DSO [days sales outstanding],”

says Yigen Pei, managing director, treasury and trade solutions at Citi. But beyond these basics, they “need to be put in a new context. After the financial crisis, we have seen companies relying more on internal cash and funding rather than purely external financing; there is more focus on optimizing cash.”

Making cash more visibleAnd just as the world has struggled with financial crisis, so China’s financial circumstances have changed too. In 2009, the government launched its fiscal stimulus, and there was abundant liquidity in the market. But then inflation became problematic last year, leading to measures to minimize the excess

liquidity, and subsequently, credit tightness. “One effect of that was to drive corporations looking towards value added solutions to optimizing their idle cash,” says Kee Joo Wong, head of global payments and cash management for HSBC in China. Or, as Pei puts it: “Cash is still king, but visibility of the cash has become an extension of that concept.”

The buzzwords in Chinese cash management are around centralizing, automation, efficiency, speed and visibility. “Clients need to centralize their inflows and outflows of cash,” explains Lin Hong at Bank of China. “They also want to know accurately, timely and wholly the relevant information about every transaction.” On payments systems, like collection, the direction is for centralization. “Clients want to use one account to pay outside,” says Qi. “It’s very easy for big groups now; they have already centralized their money to one main account, and they use that to make payments.” Two years ago ICBC developed products through which companies can collect funds from branches and subsidiaries in real time. In this way, it is easier for a company to realize centralized payment. Collections, too, continue to develop; at ICBC something called the Wise Account card has been developed, which companies use in order to collect money from their agents and sales terminals with detailed collection information.

New ideasCash management itself is not new in China– ICBC has offered it since 1998, for example – but for much of its recent history it has been offered by other bank departments (ICBC first established its Payment and Cash Management Department in 2005). “At that time (1998) we provided a very basic service to our customers,” explains Qi Zeng, deputy general manager, Payments and Cash Management at ICBC. “We used our centralized database to help them transfer money from different areas, for example, and to check information from different accounts. Since then, I can see a lot of changes in cash management.”

“After the financial crisis, we have seen companies relying more on internal cash and funding rather than purely external financing; there is more focus on optimizing cash”

Total exports USD1.6tr (2010) Total imports USD1.4tr (2010)Major exports Agricultural – 3.3% Major imports Agricultural – 7.8%(% by product Fuels and mining – 3.0% (% by product Fuels and mining – 26.7%group) Manufactured – 93.6% (2010) group) Manufactured – 64.1% (2010)Major markets European Union – 19.7%, US Major suppliers Japan – 12.6%, European Union(% of total) – 18.0%, Hong Kong – 13.8%, (% of total) – 12.0%, Korea – 9.9%, Taiwan Japan – 7.7%, Korea – 4.4% – 8.3%, Hong Kong – 7.6% (2010) (2010)Total trade USD3.0tr (2010) Total trade with Asia USD1.2tr (2010)

Source: HSBC

MARKET ANALYSIS CHINA: TRADE


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So not only have client needs evolved, but the formality through which banks offer cash management has changed too. So, for example, Bank of China offered cash management services to clients for many years through its broader corporate bank, but established a dedicated division for it in 2009, with two teams in head office, a further one and a half IT teams in support, and 50 people dedicated to it within provincial branches. At Bank of Communications, it’s the same story: business handled by different departments within the bank for many years, before being replaced by a single platform providing customized but centralized cash management services to all clients. BOCOM launched a global cash management project in 2011, which already allows for cross-border cash pooling and will soon cover settlement too. And at Agricultural Bank of China, division chief Zhang Suihai says: “Our cash management division was established in 2008.

But cash management business kicked off in 2004, and we caught the concept of cash management back in 2001.” Getting a team to work on the area full time not only shows that it is a priority, but also leads to stronger service offerings.

High investmentConsequently, Chinese banks are investing heavily. Lin at Bank of China says the bank has invested around RMB100 million in research and development around cash management systems and platforms. Banks have also made more of a priority of marketing in this area; Bank of China and Agricultural Bank of China both have brands for cash management, in ABC’s case called Xing Yun, symbolizing the aggregation of wealth and the heritage of value.

Capital account To receive capital Payments for current In principle, only one account injections and capital account items and can be opened with a bank increases approved capital located in the same region as expenditure the company and is subject to State Administration for Foreign Exchange (SAFE) approval

Settlement Account Collections for Current account items No SAFE approval is required foreign currency and items approved by current items (i.e SAFE goods-trade and/or service-trade related items)Foreign debt special To receive loan As specified in the loan Foreign debt registration andaccount proceeds from agreement, but cannot SAFE approval required fro overseas be used to repay RMB account opening loansForeign debt special Transferred from Repayment of the Foreign debt should be repaidloan repayment account other foreign foreign currency loan through a foreign debt special currency accounts, principal and interest account, unless otherwise or conversion from approved by local regulators RMBForeign currency loan To receive the loan Usage of loan is In principle, the conversion toaccount (including loan proceeds from subject to loan RMB is not allowed unlessaccount and repayment onshore foreign agreement otherwise approved by SAFEaccount) currency loans by banks or through entrusted loansForeign investment To temporarily Payment of expenses • One account only. SAFE’sspecial account receive funds and anything approval is required for(applicable to foreign related to direct associated with direct account openingcompanies) China investment investment in China. • Used for designated SAFE’s approval purpose and every transaction is required for requires SAFE approval each payment and • Unused funds can either be conversion transferred to the respective capital account (when a correspondent foreign invested entity is set up) or paid out to the foreign investor

Source: HSBC

MARKET ANALYSIS CHINA

FoREIgN ACCouNT TYpES INFLowS ouTFLowS CoMMENTS


The seniority of the department itself is also tending to rise, as is the case in Bank of China. At ABC, Zhang says: “Right now our department is a management department, a fixed organization in head office. As well as that we have the department at a province level. In each province we have a team, a marketing manager and a cash management production manager, in order to expand our business.”

A typical product line in a domestic Chinese cash management bank looks like this (this one is taken from Agricultural Bank of China): account management, covering RMB and foreign currency deposits, account statements and information services; payment and collection management, with daily settlement, universal cash saving and withdrawing, national check cashing, collection and payment agency, and centralized collection and payment agency; liquidity management, including both RMB and foreign currency cash pools, multi-level accounts books and international cash management; an investment and financing management service, including deposit management and current-to-time deposit services, short-term wealth management products, loans, overdraft and electronic commercial drafts; and risk management covering both risks and operations. Many also offer supply chain financing, to varying degrees; Bank of Communications, for example, provides solutions for supply chains covering account receivable management and financing, guarantees, domestic factoring and overnight overdraft account services.

Banks in China say that the needs of individual clients in China vary widely, even within one company from one subsidiary to another. Some are generating cash, and need to handle the liquidity; others don’t have enough cash, so need to

improve efficiency to reduce their reliance on external borrowing. But it’s the first camp – those with money that needs to work for the client - that seem to be on the increase. “Clients want the bank to provide products to help them get more returns after the bank has centralized their money,” Qi says. “If they have extra money in some period, they would like their partner bank to provide investment products to get more returns.”

“In cash management, with the premier companies, it becomes more like a strategic partnership relationship,” Qi says.

The trend overseas is discussed in more detail in later chapters, but it is interesting that some local banks consider it a consequence of problems in global markets. “Because of the crisis in 2008, from which western economies are still suffering, the cost of international settlement and financing business is higher than ever before,” says Bank of Communications. “Therefore, of Chinese-funded enterprises, the bigger central-level ones put great attention on internationalization. More and more companies have set up RMB centres in Hong Kong in response to a sustained expectation of RMB appreciation, which has led to numerous demands for cross-border global cash management.” These themes are explored in later chapters.

For multinationals, too, needs are changing – and in a similar way to local companies. “A few years back, many multinationals investing into China were more focused on setting up and building the foundations for their business,” says Wong at HSBC. “Now, in many of those companies, the scale of their business has evolved to the point where they are trying to drive increased efficiencies and the visibility and transparency of their cash. What will they do with the cash they have amassed? Invest it or optimize it or repatriate it back home?”

Looking for returnsThe sense of multinationals as newly cashed up and looking for returns and efficiency is shared by other international bankers. “Globally, companies are building up enormous stockpiles of cash, and that’s particularly true of multinationals operating in China,” says George Nast, global head of product, transaction banking at Standard Chartered. “China still has a lot of restrictions on what they can do with that surplus cash. The internationalization of the RMB will open up new opportunities in how to optimize that surplus.”

But multinationals, too, seek centralized services. “Most multinationals that have been in China for a long time are expanding to Central and West China, so are operating in a more decentralised way,” says Pei. “But they show increasing demands for centralized treasury management, in line with the trend towards integration into global or regional treasury centres.” Other themes – such as greater needs for supply chain financing – are discussed in detail in chapter six.

No matter what the business, client needs will always be affected by changes in the rules. “Demand changes in line with regulation,” says Frank Wu, head of trade finance and cash management corporates for Greater China at Deutsche Bank. “When there are new regulatory changes, clients will consult with their banks on the new opportunities, challenges and solutions.”

And if regulation isn’t changing, one can guarantee that the markets will be. “In China we also see client changes in line with the market and credit environment,” Wu says. “Previously, when the credit environment was more relaxed, we noticed that clients didn’t see much need for financial supply chain solutions. But now, when credit is tight, clients pay more attention to utilizing liquidity more efficiently and helping their supply chain partners.”

Kee Joo wong, head of global payments and cash management for HSBC in China

Population 1.3 billion (2010)Total area 9.60 million sq kmCapital BeijingMajor language(s) Putonghua (Mandarin)Time zone GMT + 8 hoursCurrency Renminbi (RMB)Central bank The People’s Bank of ChinaGross domestic product (GDP) 10,119.9bn (2010); 13.6% real growth rate (2010 est.); 7,544 per capita (2010)Inflation rate (consumer prices) 3.3%

Source: HSBC

MARKET ANALYSIS CHINA: oVERVIEw


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“RMB liberalization is the single most important development that is going to shape the global banking landscape going forward,” says Frank Wu, head of trade finance and cash management for corporates in Greater China at Deutsche Bank. “We believe the RMB is certainly advancing to become an international currency, maybe by 2020.”

New regulatory relaxations now appear to take place every month. The dim sum bond market, barely a few years old, has created a major new method of offshore circulation and fundraising for the Chinese currency. Trade settlement in RMB cross-border has moved from pilot stage to widespread use. Last year the Chinese government allowed the RMB to be used as a cross-border capital account settlement currency, allowing companies to conduct cross-border investment – either inbound into China or outbound to other countries – denominated in RMB. In October new regulations allowed offshore RMB to come back into China through foreign direct investment or shareholder loans, a crucial measure to allow RMB not just to leave China but to return. At the time of writing, a foreign exchange liberalization pilot was under way, expected to be rolled out nationwide in June. It is a transformational era.

once in a generationThis pivotal, once-in-a-generation transition clearly has immense ramifications for cash management services in China. “In a matter of months the RMB international clearing system infrastructure has started from zero to become widely available for a lot of the key trading partners of China,” says Wu. “More and more customers have either started to convert their invoicing from dollars or euros to RMB, or made direct inquiries to do so. This is going to be a key theme in the next five to eight years.”

RMB settlement cross-border is already gathering pace. Volumes have

“grown from nothing to close to RMB3 trillion” over the past three years, says Yigen Pei, managing director, treasury and trade solutions, at Citi. “For our clients, we have to emphasize that this is not only adding a currency, but understanding a new regulatory and market environment to come up new solutions and applications.”

And this is not just a question of theoretical possibilities; there are practical advantages, today, for using the currency in new ways. “Adopting the RMB has multiple benefits for multinational companies,” says Pei. “Firstly it reduces foreign exchange risk and helps centralize FX exposure. MNCs have multiple entities in China dealing with their group companies overseas; if they use RMB as a settlement currency, they can minimize FX conversion costs greatly.”

Additionally, there are benefits to the supply chain. If an industry imports raw materials from overseas, then exports them for further processing, before finally being sold in China, the currency conversion involved can lead to uncertainty in profitability; moving to RMB throughout the supply chain stabilises margins and helps profits.

Already, the way that companies are using the currency is changing rapidly. “Initially, a lot of companies benefited from the preferential exchange rate in the offshore market, such as outgoing dividend payments being denominated in RMB and converted in the Hong Kong market,” says Michael Nelson, head of corporate sales for China at JP Morgan. (Indeed, the differential in interest rates between onshore and offshore continues to be used by some companies as an alternative funding source for MNCs, which can tap the Hong Kong market and inject the funds into China.) Now, more is happening on the inward side following changes in regulations on FDI, leading to companies undertaking RMB-denominated shareholder loans into China. Changes to regulations around exporters have also helped. “A lot of suppliers onshore are offering discounts to their buyers offshore if they purchase in RMB.”

Chapter 2: RMB internationalization: right direction, uncertain timingA succession of regulations has been transforming the use of the RMB in foreign trade. But the pace of full liberalization remains unclear

Yigen pei, managing director, treasury and trade solutions at Citi

CRoSS-BoRDER FuND MANAgEMENT pRoDuCTS AND SERVICES

Source: Bank of China


“The most interesting part now is looking at the flows both ways, in and out the country, and developing centres that leverage two-way flows such as reinvoicing centres and centralized trading centres,” Nelson says.

Different behavioursThere are many nuances to the RMB, caused by the fact that it behaves in two different ways in its onshore (CNY) and offshore (CNH) forms – a knock-on effect of the fact that, while the currency can move across borders, it still does so under some restrictions. One issue for both local and foreign companies is working out exactly how these two differing behaviours in the same currency affect it, and how the two markets can work together.

“For MNCs that have a lot of imports, exports and domestic sales involving China, the internationalization of the RMB has become an opportunity to optimize both their onshore and offshore cash,” says George Nast, global head of product, transaction banking, at Standard Chartered. “They can invoice in RMB and more tightly integrate their operations related to China.” As rules around raising offshore debt and employing the proceeds onshore have loosened, “we are entering a phase that starts to integrate the on and offshore markets more and more”.

An example of a multinational making strides in China is Merck, which was one of the first German corporates to establish an RMB cash pooling structure in China, making it one of the few multinationals able to do intercompany clearing in China. Merck has said that the cash pool, which helps to ensure the best distribution of liquidity between the group’s

entities in China, has cut external borrowing costs by a six-digit euro figure per year. Merck also set up a CNY account in Hong Kong, benefitting from better onshore FX rates compared to offshore rates through non-deliverable forwards; again, Merck has said that this creates savings of up to 4%. Merck also has a CNY account in Germany.

While MNCs are the most excited about increasing possibilities in RMB, local companies can benefit from liberalization too. “As we expand our business into investment functions, currency exchange rate risk is one of our largest risks,” says Yang Hong Chao, divisional manager of the investment division at China Harbour Engineering (see Euromoney’s September 2011 China cash management roundtable for more from

Yang). “We can try to control it but cannot circumvent it. If the RMB becomes more international, then we would enjoy lower risks in the countries that have currency swap agreements with China than in those that do not.”

Correspondingly, it is not just the multinational banks that stand to do more business with a more international RMB. “We support the RMB and we support foreign currencies,” says Qi Zeng, deputy general manager, payments and cash management at ICBC. “We combine them on one platform; clients can transfer money from different countries, track information and receive reports in different currencies day by day.”

Ready for the opportunitiesBank of China, which with ICBC is probably considered the most international of China’s banks, is also ready for cross-border opportunities that come with a liberalizing currency. “In recent years the process of RMB internationalization has become faster, and we think it will have more development in the future,” says Lin Hong at Bank of China. And Bank of Communications describes the internationalization of the RMB as “a real hotspot in the international settlement area” and “an important part of cash management that can’t be neglected. RMB settlement for cross-border trade is significant progress in RMB internationalization. In the wake of that, the RMB becomes a direct trade currency.” If a local business can keep pace with this change, then it stands to benefit. “With the RMB getting internationalized faster, not only RMB cash management but also risk management, on both the exchange rate and interest rate, and investment

management are gradually regarded as the core competitive power of domestic commercial banks.”

For all that banks and clients are embracing the possibilities, there is still plenty more to be done. “There is still a long way to go,” says Wu at Deutsche. “Domestically RMB clearing is very efficient, but there is still a lack of a global standardised clearing system for cross-border clearing of the RMB.” His colleague Michael Wu says that “regulators are trying to expand CNY/CNH clearing to cover more countries, even through the SWIFT network”.

It should also be pointed out that just because it suits one party to settle in RMB, that’s not necessarily going to be in the interests of the person on the other end of the trade. And just because it’s now easy, in many developed markets, to exchange dollars or euros for RMB, doesn’t automatically mean it’s to everybody’s advantage to do so. If an exporter, overseas, receives RMB in payment, what they do they do with it? In Hong Kong, there is a modest range of investment products available – this is what underpins the dim sum bond market – but what about elsewhere? This, in turn, creates a need for China-related cash management advice even outside China: for corporate clients that are starting to receive RMB but don’t really know what to do with it.

It’s also true that Chinese companies using their newfound freedom to move outside their borders will face new challenges in having to deal with FX risk for the first time. “For Chinese companies that begin trading with the outside world, I can see that one of the hardest things that you face is

“RMB settlement for cross-border trade is significant progress in RMB internationalization. In the wake of that, the RMB becomes a direct trade currency”

BANK oF CHINA CRoSS-BoRDER RMB FuND MANAgEMENT



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george Nast, global head of product, transaction banking at Standard Chartered

working out how to hedge your currency abroad, particularly if you are trying to hedge the RMB,” says one multinational treasurer in China.

All of this is promising for banks, which can advise on all these new challenges, and about the impact of each changing regulation. “When we provide international cash management services, either to Chinese companies going overseas or multinationals coming China, we – both the bank and the customers – are all concerned about regulation,

particularly around RMB,” says Qi. “But now we can feel policies about the RMB beginning to become more flexible. More and more countries can use RMB to transfer money now. That’s why we are thinking more about what kind of services we can provide in the RMB offshore field.”

How far can you go?So the direction is good, but at the same time, it’s a little uncertain. “We just need to follow regulations to provide a service to our customers now,” says Qi. “But we can also feel customers’ concerns about how far we can go, and the timing for change; and nobody knows, actually.” Still, “the trend is going up: more and more multinationals want to use RMB to do business, and to use RMB to pay. That’s why, when we provide a cash management service to multinational companies, we normally help them to design products to have more RMB here.”

What next? One trend is that RMB liberalization, which so far has chiefly been about Hong Kong, is going to become progressively broader, with trade taking place in RMB much further afield, and other bond markets developing beyond the dim sum market in Hong Kong. “Increasingly, RMB internationalization is moving beyond just China-Hong Kong, which has been the nexus over the last few years,” says Nast at Standard Chartered. “We are seeing material payment flows into Korea, Taiwan and Japan, which is not surprising given China is the largest trading partner for all three of these Asian nations.” London is another example. “We are making sure we are not just offering cash management solutions within the single context of mainland China, but for RMB as part of a multi-currency cash solution outside China.”

Another certainty is further FX liberalization. “For at least the rest of this year, one of the biggest areas of focus by regulators is on FX reform: making it easier for companies to do transactions within China itself,” says Kee Joo Wong, head of global payments and cash management for HSBC in China. He notes that the State Administration of Foreign Exchange (SAFE), customs and tax authorities now have linked systems, which is making processes more efficient.

This is already clearly under way, judging by the changing nature of approval processes. “Previously, when you were bringing capital into China using USD, under current regulations the conversion of USD into RMB for use onshore would require SAFE approval,” Wong explains. “That sometimes becomes a challenge, given the operational overheads.” But under regulations issued in October, sending RMB back is “a lot easier, and you do not have to hedge yourself against FX fluctuations: if you have dollars sitting there for a project and it gets put on hold, and there is potential RMB appreciation, you might get a loss on your dollars. However, if you use the RMB funds directly invested into China for the project, it would be much more simplified and easier.”

Today, RMB can be brought back onshore with approval from the Ministry of Commerce (Mofcom) and a filing with the People’s Bank of China and SAFE. Anything below RMB300 million can be done by a provincial Mofcom, and over that, central Mofcom. “It’s a pretty simplified process,” Wong says.

New FX reforms for trade-related payments, currently at a pilot stage across five provinces but expected to be applied nationwide in the second half of the year, are also being studied. “Corporations can potentially look at how they can use this to centralize their processing for overseas foreign currency payments,” Wong says. Under regulations today, companies have to provide three different documents for banks to review before the bank can process a foreign currency payment. “With this change, corporations will only need to provide one of the three documents, enabling them to streamline their payment processing, and in the process, potentially gain operational efficiencies.”

And beyond that, most professionals think full convertibility is eventually on its way, and it’s just a question of when and how it gets there. The announcement that Shanghai aims to be a world financial centre by 2020 seems to suggest a fully convertible currency by then; some think it could happen by 2015, and certainly believe that there will be a far greater amount of RMB circulating outside China by then, in multiple centres, with large inbound and outbound flows.

“We just need to follow regulations to provide a service to our customers now. But we can also feel customers’ concerns about how far we can go, and the timing for change; and nobody knows, actually”


China today accounts for 11% of world trade, according to HSBC. Direct overseas investment by mainland corporations is growing by 30% a year, according to Bank of China. And it’s not just China’s goods that are moving across borders; its companies are increasingly going global, while multinationals continue to flood in to the mainland. Indeed, part of China’s 12th five-year plan aims to encourage Chinese corporates to go offshore.

This trend has a huge impact on cash management services. “Chinese companies are going global – this is a national agenda – and as they do so, they need sophisticated cash management services across the region,” says Anthony Lin, head of transaction banking for China at Standard Chartered. At every stage of Chinese corporate development – from fragmented companies around the cities and provinces, to national enterprises, to companies with foreign manufacturing facilities and offices – cash management services have needed to evolve with them.

Consider Sinopec. From 2006 it began to increase its overseas business, and by the end of the 2010 financial year, 35% of its total assets, 10% of its profits and 5% of its RMB2 trillion revenues came from overseas businesses, from petrochemical, engineering and exploration business in more than 40 countries. Its ambition is for overseas businesses to equal half the total group business by the end of the 12th five-year plan, just a few years from now. With this expansion has come a great deal of complexity for cash management: rather than just a centralized settlement and payment collection model on a domestic platform, it now has to consider overseas cash management, in different currencies, with different tax systems. Like many expansive Chinese companies, it aspires to have global cash visibility, to be able to control it electronically no matter where it is, and to be able to operate funds (which it does internationally through banks including HSBC). Chinese companies overseas need advice on treasury practices, FX risks, shared service centres and cultural norms, among other things.

Following the customers“One more thing that has changed in China cash management is that we follow our customers when they go outside China,” says Qi Zeng at ICBC. In ICBC’s case, it became much easier to do this after the bank’s IPO in 2006. “After we finished that, our international steps came very fast. Now we have 239 branches and subsidiaries over 33 countries.” ICBC also extended its centralized database to other countries, which helped it offer cash management services to clients as they went overseas. “Chinese companies, when they expand abroad, can check their information even if they stay here in their office in China. And they can use our IT ability to transfer money to other countries in real time.”

“We support the RMB and we support foreign currencies,” says Qi at ICBC. “We combine them on one platform; clients can transfer money from different countries, track information, and receive reports in different currencies day by day.”

For some banks, the internationalization of the client base takes them into unfamiliar territory. “This is a new challenge for us,” says Zhang Suihai, division chief at Agricultural Bank of China; since ABC was the last of the big Chinese banks to list, it is also newer to international exposure. “This year we will get an overseas cash management centre, and we plan to establish the first centre in Hong Kong.” Through it, ABC should be able to provide cash management, cash flow information and other services to multinationals. “Our international

As China’s companies go global, they take their growing need for sophisticated cash management services with them

Chapter 3: Opportunities from Chinese corporates going overseas and internationals expanding in China

Michael wu, head of trade finance and cash management corporates for South China at Deutsche Bank

NRA ACCouNT SwEEpINg AND INFoRMATIoN SERVICE



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department studies the needs of companies so we can provide services to them.”The international department will also be responsible for looking at trends in the RMB, including internationalization.

Building capabilityElsewhere, local banks are expanding internationally and building capability. “We want to serve these enterprises, but we have a lot of work to do beforehand,” says Lin Hong, director, corporate banking unit, at Bank of China. “First we have to establish and improve services that can be offered to all of our clients overseas, including 24-hour payment and cash management services, in multiple languages and multiple currencies. Second, we have to expand the number of our overseas outlets. Even though we have almost 1,000 branches in Hong Kong and Macau, and around the world, it’s still not enough. We need to hire more specialized professionals who know the local legal frameworks and the specifics of each local market in which we operate. “

Others are doing the same. Bank of Communications says it is “pushing its global cash management service with plenty of resources. “For example, we are increasing high speed outlets abroad, which support domestic Chinese-funded enterprises to accelerate their internationalization process and further develop the real economy in mainland China.” (Bocom, like all the big local banks, also partners with international banks; see the separate chapter on partnership for more on this.)

Naturally, it’s not just domestic banks that are excited by the increasing reach of their client base. For international banks, this appears to be their best way in to the domestic market. Chinese companies going overseas is “one of the most exciting opportunities for international banks,” according to Yigen Pei, managing director, treasury and trade solutions at Citi, since foreign banks only account for about 2% of the total banking industry market share in China by assets. “When these companies go to new markets, they need a global partnership bank that knows these markets well and has the right experience and capabilities in serving them. But that bank must also understand Chinese clients’ needs, cultural and behavioural practices.”

whys and whereforesFor Chinese companies venturing overseas, particularly state-owned ones, banks tend to advise several stages. The first is risk mitigation: cash visibility, controllability and operational ability. Chinese companies have to understand tax policies overseas and deal with the risks around currency and regulation. This level of risk management will be new for many Chinese companies, and is an important consideration. Next is investment returns: working out how, having invested heavily to go overseas, Chinese companies can make returns on the cash they have deployed. Apart from the business itself, there are also possibilities around cash pooling and centralized settlement systems that can help here. Then comes automation, in order to improve efficiency, which requires a good platform for investment and banking needs – so as to get rid of low-efficiency manual services – and using more host-to-host connections in ERP systems to reduce the amount of labour involved in a process.

Some Chinese companies are starting to develop overseas settlement centres for their cash management overseas. Some might have a controlling company which directly holds overseas assets, while others use an overseas trading company as a transit platform through which they centralize trade flows, collect overseas trade information and manage foreign exchange exposure.

“Some of the key challenges faced are around understanding local country practices and requirements, and, eventually, system integration,” says Kee Joon Wong, head of global payments and cash management for HSBC in China. “Often Chinese companies are using locally developed ERP applications, and when they move offshore and move towards SAP and Oracle, it is sometimes a challenge to integrate back into their homegrown systems.” This is discussed more in the innovation chapter.

Even if the systems challenge can be managed, there is still a broader need for integration and centralization when a Chinese company goes overseas. “As Chinese companies expand globally, there is a shift in terms of their cash management requirements,” says Michael Nelson, head of corporate sales for China at JP Morgan. “They previously set up single entity operations that were not fully integrated on a regional and global basis; now they are looking at setting up regional treasury or shared service centres with centralised payable and liquidity solutions.”

For others, the challenges may be more around unfamiliar regulation. “Expanding overseas will be a totally new area for many Chinese corporates,” says Michael Wu, head of trade finance and cash management corporates for South China at Deutsche Bank. “Their biggest challenges in the new markets are understanding regulatory requirements and customer behaviour, and this is where we can assist them.” But clients are becoming more sophisticated; Frank Wu, Deutsche’s head of trade finance and cash management for corporates in Greater China, notes that some Chinese customers are starting to implement pan-European cash pooling structures for their operations, for example.

In the other direction, international companies are getting bigger in China, which brings its own requirements.

One international luxury brand, for example, has over 20 shops in China now, including five in Shanghai and three apiece in Guangzhou and Beijing. “The basic problem we face is how to coordinate and centralize our cash management operations in a country where are sales are growing so quickly, and over such a wide area,” says Liu Sheng Liang, financial controller (see the May edition of Euromoney for a roundtable with more of his views, and views from Porsche). For this brand, cash has to be recouped from a wide geographical area back to headquarters in Hong Kong and Europe. As a retailer, the collection of the cash itself is not particularly problematic. China has traditionally been a cash economy, so a lot of transactions come in physical currency, although increasingly

BoC INTEgRATED SoLuTIoNS



Anthony Lin, head of transaction banking for China at Standard Chartered

credit cards and UnionPay (a national bank card network) are growing. Seeking to pool its funds through Hong Kong, this is an example of a company benefitting from the increasingly international RMB: whereas it used to pay the Hong Kong HQ in foreign currency, increasingly it now does so in RMB. “I would say that our cash management operations here in China have in recent times become much more simplified.”

Similarly, Porsche has 12 dealerships selling cars across China, centralized through a treasury department in Hangzhou. Pace of expansion is a challenge here. “We are in a market that is growing fast, and we are growing even faster,” says Albert Wolfmayr, regional treasurer. “That means creating a lot of new entities each time we open up a new dealership, which in turn means we need to open up new bank accounts, fill in lots of new forms, and all of that has to be linked into a centralized framework. This creates a challenge for us, as even when the products we are taking are standardized, the contracts are not.” Setting up local accounts and feeding them into a centralized cash management solution nationwide remains a challenge for multinationals in China.

Heading westIt is a common challenge for multinationals that, having started out in Beijing, Shanghai and Guangzhou, for example, they are increasingly heading west, and to second- and third-tier cities. Doing so requires familiarity with new locations and local regulatory practices, and the logistical legwork of new accounts and system integration.

Still, for many of them, having entrenched themselves in the local market, there is now time to look at efficiency and liquidity.

“Many MNCs have been here for some time now,” says Nelson at JP Morgan. “When they started, their cash management needs really revolved around corporate accounts and single-entity payables. Now they have accumulated huge war chests of cash. That’s one of the most significant shifts, with focus turning more to liquidity management: how to optimize cash within a group of companies in China, how to repatriate funds out, how to maximize the yield on the funds that remain onshore, and how to diversify their counterparty risk.”

When multinationals expand, “with more entities established, they are looking for consolidation and centralization,” says Michael Wu at Deutsche. “They are looking for efficiency to optimize their treasury activities; internal liquidity is becoming a hot topic for them.”

Wong at HSBC makes the same observations. “A few years back, many multinationals investing into China were more focused on setting up and

building the foundations for their business,” he says. “Now, in many of those companies, the scale of their business has evolved to the point where they are trying to drive increased efficiencies and the visibility and transparency of their cash. What will they do with the cash they have amassed? Invest it or optimize it or repatriate it back home? You are seeing more companies looking to value added solutions in cash management to meet each of the respective needs.”

And with expanded enterprises comes expanded risk: unfamiliar places and lesser-known counterparties. “MNCs going into the China market face certain risks from increasing penetration into the market,” says Wu at Deutsche. “They will have to engage more counterparties, so credit risk is something they seek to mitigate.”

Wong at HSBC agrees. “Given that this is such a huge region, visibility and transparency of funds in China is very important to multinationals,” he says. “As they grow into more parts of China, concerns arise about where they are putting their cash, and how safe it is. Counterparty risk is a very important consideration for many corporates.”

A regional centre from China

China has become such an important part of the region for many multinationals that they are tending to base regional treasury centres there, despite continuing restrictions on the currency. “Many MNCs are now establishing regional shared service centres located here in China, and regional treasurers are increasingly being posted here,” says Michael Nelson at JP Morgan. “This evolving landscape warrants a whole host of different, customised cash management solutions versus single entity solutions.”

This approach brings a number of challenges with it. One is hiring enough people with the right experience to staff and run such a centre. On top of that, there’s no way that cash movements can be conducted through China as they might in Singapore or even the Philippines. “Although a person in the team in China is handling the activity, a lot of the booking for non-China transactions tends to be outside China,” says Nelson. “With currency controls you still can’t book deals in China for a regional cash pool or regional FX transaction.” So why base the function in China? “One reason is critical mass: China is increasingly becoming the biggest piece of an MNC’s operations in Asia, so it does make sense to have the regional competency here.”

An example of a multinational company that has taken this approach is Continental Automotive Holding, one of the world’s largest suppliers of automotive parts, which has a shared service centre in China. Hai Feng, director of treasury and credit management for Asia, explains that more and more responsibility has been given to the China centre, rather than headquarters in Germany, reflecting China’s contribution to overall sales. But he also acknowledges limitations. “We have a shared service centre in China to cover all of China, but we realize it is not possible for China to cover all of the remaining parts” of Asia, he says, speaking at a Eurofinance conference in Singapore. “That’s why we also have centres in the Philippines and India.”


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Cash management in China requires partnership. For international banks to reach all the locations in China their clients require, they need the help of local banks. For Chinese banks to take their clients offshore, and to provide all the services they need on a single platform, they’re likely to need multinationals. And for clients themselves, their whole business is filled with counterparties.

“Choosing a banking partner is a big decision,” says Albert Wolfmayr, regional treasurer at Porsche, speaking at a Euromoney roundtable in Beijing in April. He’s right: once linked to a banking partner, it is a very big step to de-link again, so it’s important to get the decision right in the first place. In the same roundtable, Zuo Yaotao, vice-general manager of Xinxing Ductile Iron Pipes, adds: “We have to be vigilant. We are a big company with branches in many places, with multiple business divisions. So if our banks are providing us with poor cash management services, it seriously affects our bottom line.”

The criteria for bank selection tend to be quite straightforward. “When we select a cash management partner, we have to decide whether they are flexible enough to provide the range of services that we need,” Wolfmayr says. “The other vital issue when choosing a bank is pricing: our cash management providers have to be very competitive in their pricing.”

Looking for consistencyAs international banks gain traction in China and as Chinese banks expand their networks overseas, perhaps they will need each other less, but for the time being partnership is essential. “The reality is you sometimes have to rely on partner banks,” says Yigen Pei, managing director, treasury and trade solutions at Citi. “We prefer a partner bank that shares the same commitment to provide value to our clients, and have consistent services standards. It’s easy to talk to a bank, but you will be dealing with the branches, so consistency is important.”

Generally, the partner bank a multinational chooses will vary with the client. “Partner banks in China will be very much dependent on the needs of the corporate,” says Kee Joo Wong, head of payments and cash management for China at HSBC. “Certain companies when they go into China will need to go to local banks for simple reasons like petty cash, because cash is still big in China. For example, a retailer will need a local bank to provide cash collection services.”

From a corporate perspective, choosing a cash management bank tends to come down to certain key considerations. A big one is typically the range of branches; this, for example, is something Agricultural Bank of China markets itself upon, since it has an extraordinary 24,000 offices across China. In fact, the big five domestic banks now have broad networks that cover every province where services are likely to be needed, and the international banks are familiar with the various areas of strength of the locals. “Based on our experience, we know which partners to bring in according to their location,” says Wong.

Agricultural Bank of China, for example, clearly makes sense for a client needing to reach rural areas in the agricultural sector. “Our recommendation of which state-owned bank a client should work with is driven by that client’s needs - for example, if the client wants access to rural markets, we will probably recommend a particular bank over another,” says Frank Wu, head of trade finance and cash management for corporates in Greater China at Deutsche Bank. “Also, clients who already have an existing relationship with a local bank and can work with us in partnership as well.” Deutsche cooperates with all of the big five banks in China.

But local banks may be relatively strong in one city or another, just as internationals are perceived as being strong in particular markets. “The challenge with local banks is that they are sometimes not as coordinated as one would expect,” Wong says. “It can sometimes be a challenge to get them to agree to a pan-China agreement.”

Since 2005, ICBC has chosen some international banks for cooperation. “During that time, more multinational companies came to China and they wanted their original partner bank to provide comprehensive services to them,” explains Qi. “So international banks would come to ICBC and ask if we could provide more local service so they could offer those comprehensive services to multinational companies.” Going the other way, for Chinese companies moving overseas, ICBC will work with some banks it is already linked with – like HSBC and Citi – “but more often we choose very local banks in the countries the Chinese companies are going to.” ICBC uses Swift to cooperate with the other banks.

Bank of Communications says its preference for bank cooperation is made on three criteria: local service level; IT ability and system integration experience; and a common view from both sides. “At the moment, Bocom has reached agreement with many top-tier international banks on cash management cooperation and resource sharing,” the bank says.

Linking systemsOne common approach among international banks, covered in more detail in the chapter on innovation, is to build systems which link directly with partner banks to the point that clients can access those local accounts while still being on the international bank’s system. This overlay approach means that the client never steps away from the familiarity of the international platform, yet can transact locally. Deutsche and HSBC do this, for example, as does JP Morgan. Michael Nelson, head of corporate sales for China at JP Morgan, calls this process “giving clients a single front end regardless of which local bank they are using”. Nelson says JP Morgan has taken this one step further, so that clients can deposit cash or cheques into a partner bank’s network and it will automatically be swept into a client account at JP Morgan.

One trend for the future will be cooperation with other financial service providers. “Beyond our partnerships with the five domestic banks,

Chapter 4: Finding a trusted partner: Partner bankingCash management in China is all about partnership, for both Chinese and international players. Which makes finding the right partner all the more difficult


we are also keen to develop partnerships with non-bank institutions,” says Anthony Lin, head of transaction banking for China at Standard Chartered. An example is a partnership with Union Merchant Services, which is a subsidiary of China UnionPay, to support insurance companies’ premium collection. “The volume uptake there is unbelievable: we expect the volume this year will be triple that of 2011.”

As for clients selecting banking partners, alongside the traditional criteria – breadth of service where their business is located, willingness to lend, information and management systems, product range – it is likely that international skills will become more and more of an issue in the years ahead. Local banks are already hiring heavily overseas in order to meet this need, and to build their competence in cash management in regional and international markets. The ability to handle foreign exchange transactions is becoming increasingly important as the renminbi liberalizes, and in future it won’t just be about dollar cross rates but other currencies, particularly in Asia.

Considering counterpartiesFor all companies, local and multinational, bank partner selection has become much more important since many banks were downgraded in the wake of the global financial crisis. Counterparty risk is probably a bigger consideration today than it has ever been: companies look at credit ratings

of banks, and the banks in turn differentiate themselves from one another based on that rating and stability. Another trend is that multinationals in particular will decentralize their risks by choosing several banks as partners. Last year at a Euromoney event, Jiang Shuming, deputy general manager, Treasury Management and Settlement Department, at China Construction Bank had this to say, and it remains true today: “We need to pay greater attention to counterparty risk since the financial crisis. There are lessons to be learned around cash management for Chinese companies that have gone abroad, especially regarding investment products and structures. It is important for companies to select a product and a financial institution that is appropriate to them. In the beginning Chinese companies didn’t make full use of their banking partners, but in the future there will be more and more investment products closely related to the banks, so the soundness and performance of banking partners is important.”

Even as banks evolve their services, China’s sheer scale will mean partnership remains essential in order to give clients the full service they need. “We have 13,000 outlets at Bank of China, and even with that number we cannot solve all the needs of our customers,” says Lin Hong at Bank of China. “So in choosing our agent banks, we choose powerful partners with brands who can radiate to a larger area, with high quality staff and strong internal control mechanisms.”

“We have to be vigilant. We are a big company with branches in many places, with multiple business divisions. So if our banks are providing us with poor cash management services, it seriously affects our bottom line”


Innovation in technology and multimedia


Bank Name Bank of China

ICM strategy To be the first-choice for the local and global clients’ cash management bank

Region Infrastructure and Country Coverage

Bank processing systems for region One country centre

Host to host connectivitity Yes

Number of Professional ERP system supported 10-20

Region Country Coverage

Full service branch countries 33

Direct access to local Paper clearing systems 21

Same day clearing systems 21

Automated clearing house 21

Country Coverage (Full Service Branches) Own Partner

177 Country,1645 Bank

Asia China 10199 202

Hong Kong 260

Macao 27

Taiwan 1

Australia & New Zealand 8 20

Indonesia 6 16

Japan 5 108

Malaysia 5 16

Phillipines 1 11

Singapore 8 8

South Korea 4 15

Thailand 1 15

Vietnam 1 13

Cambodia 1 4

Kazakhstan 1 7

Europe UK 6 52

Switzerland 1 30

Ireland 1 7

France 2 44

Germany 3 74

Luxembourg 4 14

Italy 2 67

Hungary 1 8

Russia 1 48

America USA 3 85

Canada 6 16

Cayman Islands 1 2

Panama 1 3

Brazil 1 21

Africa South Africa 1 5

Zambia 1 3

Other Country and Region 731


Payment and Collection Services (No. of countries where available)

Mass Payments 21

Mass Collections 21

SWIFT MT940/950 available 33

SWIFT MT101/103 available 33

Liquidity management Services (No. of countries where available)

Multi-Lateral Netting Possible number of currencies 25

No. of countries covered 33

Notional Pooling Full offset 27

Partial offset 27

Number of pooling currencies supported 25

Locations where master site/pool can be located 27

Zero/Target Balancing Domestic 27

Cross Border 16

Automatically Triggered Intra-day Between own branches 27

MT101 agreements bank 33

Overnight sweep & funds returned next day 27

Location where master site/pool can be located 27

Investment Services

On-line Investment Portal Own & third party

Investment instruments deposit, bond, gold, fund etc

Delivery & Customer Service

Single customer service department for region & location yes

Single customer service contact for whole region yes

Customer service department/country yes

Customer service performance level guaranteed yes

Opening hours Local working hours

Bank of China is the most international bank in China.It can provide multinational enterprises with professional global cash management services.


China is ripe for innovation in cash management. Firstly, that’s a natural situation in any market where client needs are advancing quickly. And secondly, China’s unique restrictions and challenges around its currency also push banks to devise new solutions.

Bankers agree that the prompt for innovation has to come from clients, not just for its own sake. “Companies, who have their own finance management needs, come to us with new ideas: new IT, new technicals, new management structures,” explains Zhang Suihai, division chief at Agricultural Bank of China. “So when they have new demands and new thinking, we will develop our products and services so we can meet their needs.”

In practice, these client needs typically include greater automation for payment and collection processes; clearer and faster visibility; pooling and other liquidity management; and integration of systems, particularly internationally.

getting accessAt ABC – and this is common among cash management banks in China – a consistent area of development is access channels. ABC, for example, allows access through host-to-host link, corporate cash management interface, electronic banking, and over-the-counter. “Host to host is a direct link from the ERP of the company direct to our system,” explains Zhang. “But only the largest banks and companies use host-to-host links. Medium and smaller companies use our platform or the cash management interface.” One trend in years ahead will be more companies migrating to host-to-host direct links.

Following this through, host-to-host linkages can be used between foreign and international banks so that a foreign client, going through its usual foreign bank, can get direct access to local bank accounts through the foreign bank’s platform. HSBC, for example, has a number of host-to-host linkages with local banks, so that a company can use HSBC’s platform and access local accounts in some of the local banks – not just for account information but for third-party payments. This allows HSBC to provide an overlay structure for many corporates that require a best-in-class foreign plus local bank partnership.

The increasingly international nature of Chinese clients creates its own needs for innovation. One is the challenge of meshing differing systems. “Some of the key challenges faced are around understanding local country

practices and requirements and, eventually, system integration,” says Kee Joo Wong, head of payments and cash management for China at HSBC. “Often Chinese companies are using locally developed ERP applications, and when they move offshore and move towards SAP and Oracle, it is sometimes a challenge to integrate back into their homegrown systems.”

This is a bigger challenge than one might think. “They are different: Chinese systems cater to China’s own in-country requirements and rules, and other foreign ERP systems more often than not have different configurations, often with disconnects in between.” With so many Chinese companies venturing overseas, this is clearly going to require a lot of effort to address. “For Chinese corporates going offshore, there will need to be a lot more of finding ways to integrate with ERP applications used offshore,” Wong says.

Heavy liftingBanks have embraced this challenge with the imperative being to take the complexity away from the client and handle it with the bank’s own systems. “Our approach there [host-to-host integration] is to do as much of the heavy lifting as possible on the integration side so clients don’t get burdened with it,” explains Michael Nelson, head of corporate sales for China at JP Morgan, which has platforms that can accept different file formats from different ERP systems. And Anthony Lim, head of transaction banking for China at Standard Chartered, says: “While Chinese companies are using local ERP systems, we have developed capabilities so we can link their system with our platform. We don’t see this [system compatibility] as being a big problem in providing high-quality cash management services.”

For local houses, a challenge has been to get up to speed on the core technology platforms and systems, and the bigger banks now feel they have state-of-the-art electronic backbones in place. “The key point for innovation is that it depends on our very strong IT system,” says Qi Zeng at ICBC. “On this system we design different products every year based on our customers’ requirements.” Historically innovation used to be about the speed and breadth of account information that was available, and efficient transfers. “But now we design more products to support clients’ liquidity requirements,” such as cash pool, she says. “Also, we use the cash pool concept to centralize clients’ bills, and they can use it to have more liquidity based on their credit lines.” Bank of China has spent heavily on research and development, particularly on the technology side; this has been absorbed into the bank’s overall risk management systems as well. “Through the

Chapter 5: Innovation in technology and multimedia

Chinese systems cater to China’s own in-country requirements and rules, and other foreign ERP systems more often than not have different configurations, often with disconnects in between”

China poses unique cash management challenges, forcing banks to innovate to meet new client needs


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cash management platform we can gather their funds and transaction details and pass them immediately to our risk control department,” says Lin Hong, director of the corporate banking unit at Bank of China. “As we have better coordination with our credit risk control department, the platform will play a great role in the future.” And Bank of Communications has launched several new products and solutions in recent years, including an accounts receivables management service package, a SWIFT NET direct link channel, virtual accounts, multi-bank solutions, cash and bill pools, customized batch and reporting services, and electronic bills.

Supporting liquidityHistorically, domestic innovation used to be about the speed and breadth of account information that was available, and efficient transfers. “But now we design more products to support clients’ liquidity requirements,” such as a cash pool, says Qi. “Also, we use the cash pool concept to centralize clients’ bills, and they can use those based on their credit lines.” Another area of innovation is about supply chain requirements. “That is important for big groups here,” Qi says. “Also when some multinational companies come to China, like Wal-Mart, they become our customers for supply chain services.”

At the internationals, innovation has tended to focus either on getting around the challenges imposed by Chinese regulation, or by adopting new technologies. “China for us has been an interesting laboratory for innovative liquidity management structures,” says George Nast at Standard Chartered. “For example, it is difficult for companies within the same group in China to move cash around, so we have developed solutions that allow companies to optimize cash within group structures. There are interesting benefits in some of the innovations that China has thrown up that we are now using across other parts of our group.”

Another example of this is banks getting ready for the changes in widely used systems in China, as the country builds the infrastructure for a more international currency. “From a business perspective, we are making the necessary investments to put in place infrastructure for the

internationalization of the RMB,” says Nast’s colleague Anthony Lim. An example is the CNAP system, the code used for many payments in China. It is currently not compatible with global networks, so a CNAP 2 system is under development, and banks are bringing in resources to be ready for it.

At Citi, as at Standard Chartered, regulatory challenges have spurred innovation. “Outside China, you have physical cash pooling, but in China you can’t do it because intercompany lending and borrowing is not permitted,” says Yigen Pei, managing director, treasury and trade solutions at Citi. “However, there is an entrustment loan concept, where a company can lend through a bank acting as an agent. We thus created a liquidity management structure in China by using existing liquidity management technology and taking the form of entrustment loan under a master agreement mechanism.”

Other new ideas at Citi include an RMB re-invoicing centre for a Japanese company, through which it has set up a Hong Kong finance company, and then bills and settles with Chinese companies in RMB; its counterparties elsewhere in the world also bill and deal with it in RMB, so the net RMB exposure can be centrally managed out of Hong Kong. Another is a RMB netting solution for a German company. “It achieves same day settlement, which is a good and efficient way to lower operating and FX conversion cost,” Pei says.

At JP Morgan, areas of innovation include automation around reconciliation; a product called Receivables Edge which gives clients online visibility of incoming receipts together with reference information

to allow it to set against open account receivables; and a liquidity management portal designed for China that has since been rolled out regionally. Elsewhere, HSBC has focused on the experience when new clients are brought on board, allowing them to view the entire implementation process with a single internet-based platform called ClientSphere. And at Deutsche, an example of innovation is a new online integrated payment and FX platform, FX4Cash, allowing clients to execute FX payments through a single currency account, and execute the payment of the transaction and the FX conversion simultaneously. “The benefit is they don’t have to maintain multiple foreign currency accounts,” explains Deutsche’s Frank Wu. “It greatly reduces the surplus liquidity in each account.”

Across the board, international banks are also working at ways to bring cash management services in China on to mobile applications; HSBC, JP Morgan (with its ACCESS Mobile platform), Deutsche and Citi, among others, are rolling out products here, allowing customers to view balances and authorize payment transactions from their smartphones. “In the past, our clients delivered goods to their vendors against cash,” explains Pei at Citi. “They can now accept these vendors using mobile devices to instruct their banks to pay instantly when they deliver the goods, so payment is done electronically.”

“China for us has been an interesting laboratory for innovative liquidity management structures”

China poses unique cash management challenges, forcing banks to innovate to meet new client needs

IN-CouNTRY SwEEpINg



Financial supply chain management is a growing trend all over the world, but during the past 18 months it has gained particular currency in China. As an anchor of trade worldwide, China is a natural place for clients to want to secure health and finance among their supplier base, but it’s only during last year’s period of credit tightening that the approach became particularly important.

“China is the world’s biggest trading nation and exporter, so it is the supplier base for a vast number of global companies,” says George Nast, global head of product, transaction banking, at Standard Chartered. Little surprise, then, that he says “supply chain finance is one of our strongest global propositions to MNC companies in China”.

His view is repeated across all international and local cash management players in China. “We do see a lot of interest in supply chain finance,” says Michael Nelson, head of corporate sales for China at JP Morgan. Until recently, liquidity was plentiful in China, and there was little concern about suppliers accessing sufficient finance. But when that changed, and monetary policy tightened, enthusiasm for supply chain solutions grew. “During a period of

monetary tightening, buyers wanted to set up programs to support suppliers and made sure they had access to capital at a competitive rate, when a lot of smaller suppliers could not secure financing on a regular basis.”

China has since loosened monetary policy a little, but the interest in supply chain finance has remained. “Even though the monetary stance has since changed, we see corporates continuing to set up supply chain finance programs so as to provide longer-term stability, because who knows when tightening could re-occur,” Nelson says.

Health concernsCertainly, concerns about the medium-term outlook for the Chinese economy make supply chain solutions more vital, because a dour economic environment naturally makes the health of smaller suppliers more vulnerable. “With the growth of the economy looking to be moderated, many corporates are very concerned about the health of their suppliers, and whether they are going to be able to provide them with the goods and materials they need or simply if they will have the investment capital to purchase goods from the company,” says Kee Joo Wong, head of payments and cash management for China at HSBC.

Supply chain finance is already being divided into a number of distinct services. Belinda Han, head of trade finance and cash management corporates for North China at Deutsche Bank, says Deutsche offers three types of financial supply chain solutions: supplier finance, accounts receivable (AR) finance and distributor finance.

Supplier finance is the most common form in the industry, and the one with the greatest demand. “Basically, we offer credit support to the anchor client, who is normally an MNC engaged with numerous suppliers in China,” says Han. “The suppliers can use the credit support we give to the anchor client to gain lower cost financing from the bank.” This is particularly useful when liquidity is hard to come by. “Last year, the liquidity in the market was very tight, and it was not that easy for suppliers to access sufficient funding,” Han says. “This type of financing can give those suppliers sufficient credit support based on their relationship with the anchor client.” The biggest cash management banks can link this in with their e-banking system, and can allow suppliers to access finance by submitting discounting or financing requests through the electronic platform – this is the case at Deutsche, for example.

Reaching the suppliersIt’s natural that supplier finance should be the mainstay of this part of the industry, because of the sheer scale and number of suppliers working for domestic and multinational companies. The ability to reach these suppliers is already something banks market themselves upon. “The key differentiator we

see is in having the depth and breadth within China to tap the vast supplier base,” says Nast at Standard Chartered. “When it comes to suppliers, everyone invariably thinks of FoxConn, the large supplier for Apple; the reality is there are thousands of suppliers of more medium size.”

Beyond that, distributor finance is growing too. “This is important for international clients who engage a number of distributors, to help them penetrate into the China market, especially in tier two and tier three cities,” says Han.

While supply chain financing is a concept that started in the west, local Chinese houses have been quick to embrace the opportunity. Lin Hong, director, corporate banking unit, at Bank of China, says that “trade finance and supply chain finance is one of our main products we provide to the market,” and that business in this area is “growing by almost 20% annually”.

“This solves the financial requirements of core enterprises and their upstream businesses and partners,” Lin says. Just like multinationals, Bank of China discounts bills and offers factoring products and issues letters of credit up and down the supply chain, applying the creditworthiness of the parent to other businesses in the chain. Elsewhere, Bank of Communications says “there is huge demand for supply chain cash management.” Bocom has launched an electronic supply chain project and is providing clients, including Suning and Yurun, with customized solutions; clients include companies in the steel factory, biology and medical areas. It offers a system called 1+N mode,

Chapter 6: Financial supply chain managementCorporates around the world are paying increasing attention to the financial health of their suppliers. China’s pivotal position in world trade make this a particularly important issue there

“China is the world’s biggest trading nation and exporter, so it is the supplier base for a vast number of global companies”


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integrating the information and systems of enterprise and logistics companies along the chain through its electronic information platform, “which ensures the safety of inventory, and optimizes a formerly paper-based operation flow”.

“More and more multinationals use this service,” says Qi Zeng at ICBC. It is not straightforward, though. “First of all we need to consider the core companies’ asset ability, and we need the core company to provide a name list based on their business. Then we have some supply chain products for them: trade finance, letter of credit, and so on, and then companies within the supply chain can use them to get a guarantee from the bank. This applies to up and downstream enterprises, and we can provide finance to them.”

Wal-Mart, for example, is one of ICBC’s first customers in this area. “First of all Wal-Mart provides the name list to us. That proves those companies have a very strong and close relationship with Wal-Mart. After that, we use finance products, like credit letters, based on Wal-Mart’s credit line, to give their up and downstream enterprises support.”

Names on a listSupply chain financing is not straightforward, though, as Qi explains. “First of all we need to consider the core companies’ asset ability, and we need the core company to provide a name list based on their business. Then we have some supply chain products for them: trade finance, letter of credit, and so on, and then companies within the supply chain can use them to get a guarantee from the bank. This applies to up and downstream enterprises, and we can provide finance to them.”

Walmart, for example, is one of ICBC’s first customers in this area. “First of all Walmart provides the name list to us. That proves those companies have a very strong and close relationship with Walmart. After that, we use finance products, like credit letters, based on Walmart’s credit line, to give their up and downstream enterprises support.”

Over time, just as supply chain needs have moved from suppliers to include distributors too, the range of systems covered by supply chain financing has increased. “The challenge and opportunities in China are not on payments – it is relatively easy to initiate payment and connect into a system – but on collection,” says Yigen Pei, managing director, treasury and trade solutions at Citi. “Supply chain management means providing financing along the supply chain, on the AP [accounts

payable] and AR side. On AR, it’s reducing counterparty risk, achieving a lower cost of funding and optimising the balance sheet. On the AP side, it’s improving the working capital cycle and helping supplier get financing.”

Nast agrees that supply chain financing has moved beyond just supplying money to suppliers. “It’s not just a financing tool – though that is important for a big buyer or anchor client in the US or Europe to ensure their supplier base has sufficient working capital to provide products,” he says. “It is also a tool for global MNCs to manage their own payables, to settle and reconcile their dealings with a whole variety of smaller suppliers.”

As with all other areas of cash management, technological smoothness is key. “MNCs want integration within the purchasing and invoicing systems,”

says Nast. “They want this to be seamless; they don’t want to deal with lots of paper drop hoops between when products get purchased from suppliers and the ultimate financing.” And Frank Wu at Deutsche talks of the differentiation that comes with integrating supply chain management with technological solutions. “Not all the banks in the market can do that. Chinese banks can offer supply chain solutions on a bilateral basis – one buyer one seller – but what we do is provide solutions to hundreds of suppliers of a single anchor client in the China market.” Visibility is key; JP Morgan, for example, uses an automated system where a supplier can view and discount confirmed payables from its customer on-line. This can be done onshore or cross-border.

For the future, one interesting development is companies leaving out banks completely when it comes to providing supply chain to their suppliers, using the third-party entrusted loan approach in which a bank is just an agent. “Sometimes they finance their suppliers without using banks,” says Wong at HSBC.

But whatever path it takes, the overall need for supply chain finance is going to increase, from multinationals and growing local corporations alike. “We see supply chain programs gaining popularity not just among MNCs but also big domestic companies,” says Anthony Lim, head of transaction banking for China at Standard Chartered. “A lot of Chinese companies are multinationals as well, but China-based, and their needs are very similar to those of MNCs from the US or Europe.”

“The key differentiator we see is in having the depth and breadth within China to tap the vast supplier base”

A poSSIBLE TAX-EFFECTIVE SuppLY CHAIN MANAgEMENT (TESCM) STRuCTuRE

uSINg A SuppLY CHAIN MANAgEMENT SERVICE CoMpANY (SCMC)

TRANSACTIoNAL MoDEL uNDER A TYpICAL pRoCuREMENT

CoMpANY STRuCTuRE


Small and medium enterprises are widely understood to be the future driver of the Chinese economy. Chinese premier Wen Jiabao has spoken about the importance of encouraging the development of SMEs, and the transition of this group, from emerging businesses to established companies to multinationals, will define how China looks in the coming decades.

SMEs have become a key part of both local and international bank strategy. Lin Hong, director, corporate banking unit, at Bank of China, believes there are more than 13 million SMEs, and that only one in 10 of them can get access to credit. “We need to supply cash management business to medium and small enterprises,” Lin says, noting that Bank of China – with 2 million clients in its corporate banking business – is well placed to do so. “We can help SMEs by accelerating their cashflow, through collecting their revenue efficiently and accurately,” Lin says. “Companies can optimize their inventory and accounts receivable. It’s very important for a big bank like ours to provide good service in cash management to SMEs.”

Bank of Communications, too, has identified SMEs as a key area. “A strong priority of ours is certainly providing cash management services to SMEs,” said Yao Wei, senior manager at Bocom, at a Euromoney roundtable held in April. “One of our aims is to make upstream and downstream SMEs of core large enterprises more efficient, to provide access to supply chain financing, and to offer electronic services and online loan application services. Financing is still the biggest challenge for most SMEs, so we want to find ways of improving cash management services even for smaller clients – helping them raise working capital, and optimizing their internal liquidity, to ensure that they are growing their business alongside us.”

Credit riskAt the same time, SMEs do necessarily represent something of a credit risk. Some Chinese banks, seeking to provide cash management services, find themselves being asked for lending; they seek to provide credit support to the best SMEs, but they are also cautious, as SMEs sometimes do not have collateral or even complete financial reports. “In my opinion, the best way to support the remaining 90% of companies – the ones that can’t get access to credit – is to start from a cash management perspective,” says Lin. One way to do that is to reduce SMEs’ inventory and accelerate their capital turnover, so the revenue they generate goes into the next round of production. “I think this is the

future for SMEs, and vital to their success: by providing efficient cash management services, we can reduce the cost of cash management for SMEs and help them improve their cash turnover,” says Lin.

Multinational banks, too, see the opportunity in SMEs, but today note those companies are mainly looking for capital rather than the liquidity management solutions that international companies tend to require in China. “The vast majority of SMEs in China are in the growth stage of business development,” says Frank Wu, head of trade finance and cash management for corporates in Greater China at Deutsche Bank. “They are more interested in financing solutions: finding ways to finance the fast growth of their business, rather than managing surplus liquidity.” SMEs are typically looking for efficient working capital and trade financing solutions, perhaps including inventory finance or supply chain financing solutions.

In order to deal with the credit risks involved, international banks tend to focus on SMEs that are linked to larger corporations – because

they are subsidiaries, have some common degree of ownership, or are members of the supply chain to the larger corporation. That brings banks into financial supply chain territory (see separate chapter); they can extend trade finance to SMEs and help them to manage their liquidity, helping them to grow, while also insulating the bigger customer from disruption of supply.

Battle for capitalOn the financing side, SMEs in China do face a continuing battle for capital, exacerbated by the tightening of credit conditions in 2011, though they have since somewhat eased. “A lot of companies last year, when they were looking at funding, looked at bank-accepted drafts and getting them discounted,” notes Kee Joo Wong, head of payments and cash management for China at HSBC. “That’s because the difference between that and a working capital loan rate went up quite a bit last year.”

Local houses are galvanized by the fact that helping SMEs, which are part of the state’s vision for China’s future, has a social importance beyond the profitability it brings to the bank. “We can serve the people, serve society, and make profits through doing so,” Lin says. Better still, today’s SMEs are tomorrow’s corporate blue chips. “If they grow smoothly, and become bigger and bigger, we hope they will remain loyal to us.”

Chapter 7: SMEs: driving the future

Smaller companies are seen as key to the future of the Chinese economy and crucial to the banks’ activities

“Financing is still the biggest challenge for most SMEs, so we want to find ways of improving cash management services even for smaller clients”


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