Thursday, January 19, 2017

Treasurers should take the reins of Chinese liquidity

Corporate treasurers who keep themselves abreast of China’s fast-changing rules and experiments on capital flows will find the effort pays off.

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Until recently, the treasury functions of multinationals had to hold cash in their Chinese operations separately from cash generated elsewhere.

However, a loosening of the rules and the internationalisation of the Chinese currency have eased the cross-border flow of funds, helping companies strengthen their cash management across the whole business.

Changing conversations

Drew Douglas, Head of Global Liquidity and Cash Management North America for HSBC, has seen an evolution in the dialogue between the bank and multinationals since the first relaxing of restrictions on renminbi conversion.

"Initially, a lot of these conversations were buyer-to-supplier, often in manufacturing. Things have changed a lot over the past couple of years," he says.

Corporates are now aware of the potential to gain visibility and control of the liquidity in their Chinese operations, and, critically, ready access to their cash. They are also better able to bring cash management practices into line with global standards.

"Treasurers are looking to create more efficiencies – either through regional or global pooling. Since Chinese restrictions on some of that activity lifted in 2013, people have been trying to include China in those efforts," Douglas adds.

Treasurers are looking to create more efficiencies – either through regional or global pooling. Since Chinese restrictions on some of that activity lifted in 2013, people have been trying to include China in those efforts.

Drew Douglas, HSBC

Fluid rules

Notional cash pooling is now possible on a domestic and cross-border basis in both RMB and foreign currency. However, some restrictions remain, and it's important to keep track of changing policy in China.

In response to RMB devaluation in early 2016, for example, the government quietly tightened up capital controls, restricting cash pooling to ensure no net outflow of capital. This has made it harder to remit money out of mainland China.

These changes were never officially announced, but were relayed verbally to banks – underlining the difficulty for companies on staying clear about current policy.

"Corporates still have to be tactical and nimble in terms of their ability to repatriate capital," Douglas says. "The most important piece of advice is 'stay close to your local partners'. China is a moving environment and the regulations do change."

Pilot programs

In addition, corporates could take advantage of potentially beneficial schemes in China's free trade zones.

For instance, pilot programs in the Shanghai and Beijing free zones have enabled companies to carry out cross-border inter-company loans and cross-border sweeping.

"These programs don't get a lot of publicity, but HSBC is often involved in them," Douglas says.

Such schemes are often used as test-beds for policy that might later be rolled out across the mainland. To have an opportunity of enjoying early benefits, corporates would be well advised to find a banking partner with a deep knowledge of the country and a well-established network there.

To learn more solutions for managing cash flow and liquidity visit: Working Capital

This article is intended solely for informational purposes. HSBC Bank USA, N.A. assumes no obligation to update or otherwise revise this article. The information, analysis and opinions contained herein constitute our present judgment which is subject to change at any time without notice. Nothing contained herein should be construed as tax, investment, accounting or legal advice. In all cases, you should conduct your own investigation and analysis of each potential transaction, and you should consider the advice of your legal, accounting, tax and other business advisors and such other factors that you consider appropriate. This is not a recommendation, offer, endorsement or solicitation to purchase or sell product or service.

HSBC Bank USA, N.A. 2016. ALL RIGHTS RESERVED. Member FDIC.

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