HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific 2014Greater China Edition

Foreword Contents

HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific 2014:

Greater China Edition

Welcome to the latest edition of HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific. Once again, it brings readers a range of valuable insights and informed opinions from some of the region’s leading banking and business professionals.

This time, however, you will notice that our format has changed. Instead of bringing you an annual round-up of emerging trends and key developments, we will now be reporting on them every quarter. Given the sheer pace of change across the region, we believe the argument for faster and more frequent industry updates speaks for itself. This is particularly true when it comes to Greater China, which – as its title suggests – is the focus of this edition.

As accelerating change continues to raise dust across the business landscape, our expert writers aim to bring clarity to the critical issues facing businesses operating inside and outside the Mainland.

One of the strongest messages to emerge from this edition is that the authorities in Shanghai are taking the globalisation and liberalisation of the RMB very seriously, as the launch of flagship initiatives such as the Shanghai Free Trade Zone (SFTZ) demonstrates.

As we have seen, the SFTZ has attracted intense interest from the international media and global business community. But, rather than expecting the zone to trigger a ‘big bang’, we argue that multinationals must assess the SFTZ in the widest possible long-term economic context to ensure they unlock maximum value from the prolific opportunities the zone is creating.

The Kunshan Experimental Zone is another example of China’s concerted drive to globalise and liberalise its national currency. Here, flourishing Taiwan-based businesses such as Kunshan President Enterprises Food Company Limited are already reaping the benefits of a pioneering initiative designed to streamline the two-way flow of RMB funds between China and Taiwan.

Among other issues, we also focus on why the benefits of implementing a clearly thought-out RMB liquidity strategy are not confined to multinationals with pressing offshore funding requirements. We also consider why businesses that do not implement an RMB liquidity strategy risk losing out on very important benefits. Elsewhere in this edition, we explore the popular myth that technology and infrastructure obstacles are still making it difficult for corporations to implement a cash management strategy for Greater China.

Meanwhile, I would like to conclude by thanking the various clients, colleagues and external experts whose editorial contributions have brought such depth and nuance to these articles. With their support, I have every confidence that our quarterly updates will remain a vital source of information and guidance to all our readers.

John Laurens

Head of Global Payments and Cash Management, Asia-Pacific, HSBCTel: (852) 2822 4060E-mail: johnlaurens@hsbc.com

Renminbi realism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Shanghai Free Trade Zone

Unlocking new trade, investment and financing opportunities . . . . . . . . . . . . . . . . . . . . . . . 10

A new chapter in China-Taiwan economic cooperation

The Kunshan Experimental Zone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Creating a Greater China cash management strategy . . . . . . . . . . . . . . . . . . . . . . . . . 22

AkzoNobel

Optimising cash management in China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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Renminbi realism

Relatively low offshore rates have led many to assume that only those with pressing funding needs elsewhere will currently find the process of moving surplus renminbi offshore worthwhile. But as Mario Tombazzi, Regional Head of Liquidity and Investments for Asia Pacific, and Vina Cheung, Global Head of RMB Internationalisation, Payments and Cash Management, at HSBC explain, a combination of other factors and opportunities needs to be considered.

The renminbi (RMB) is clearly a currency that is going places in international markets. According to SWIFT, the RMB is now the seventh most popular currency for payments in terms of value1. Furthermore, 16% of China’s total trade is today settled in RMB, a figure that HSBC Research believes could rise to 30% by 2015. The regulatory changes announced by the Chinese authorities over the past few years also suggest that this momentum is likely to persist. But while recent regulatory changes permitting RMB lending by onshore entities to those offshore have captured headlines, the question still remains as to who benefits from this environment and how?

The answers depend upon who you are. For Chinese multinationals, the funding of their international expansion using their functional currency has become far more straightforward. Onshore RMB surpluses can be immediately invested in new overseas business and the continued funding of existing and new offshore activities is also allowed.

For other multinationals the situation is more nuanced. Those with significant deficits in other countries obviously have a strong incentive to cover those deficits with surplus RMB liquidity they have accrued in China. For them, the effort required to integrate China into their existing global or regional liquidity structures is worthwhile, because of the reduced overall funding costs they can achieve, plus increased control over the redeployment of internal financial resources.

For non-Chinese multinationals without structural or seasonal funding needs elsewhere, the advantages of incorporating RMB into their global liquidity structures to facilitate mobility of Group

funds offshore are on the surface less clear cut, but are in fact far more compelling than they seem. At first glance, the fact that the liquidity and rates available in instruments relevant to most treasuries are lower and more volatile in offshore centres than their onshore counterparts would seem to beg the question for these multinationals of: why bother?

In fact there are a number of reasons. As mentioned earlier, the RMB is clearly a currency that is going places, so the question actually covers two very distinct topics:

• The convergence of processes and governance practices into standards which are already adopted in the management of the business in other markets. This includes procurement and invoicing,

and extends to cash management, liquidity management and risk management – relevant to all multinationals

• Realising maximum value from internal sources of liquidity, from both a financial and a liquidity/funding risk standpoint

A logical progression

The business case for managing RMB in the same fashion as any other global currency is linked to changes in how it is being used and treated. In the first stage of RMB liberalisation, the focus was on trade settlement. Corporate clients were primarily concerned about:

• The commercial benefits they could realise by converting to settlement in RMB

• How they could make trade payments to China out of their home countries without difficulties

• How they could manage their purchase of RMB efficiently

• The operational and invoicing changes group entities would have to make in preparation

However, this also represented the first stage in assimilating RMB into existing global/regional payment processes and re-engineering in the interests of efficiency and control.

In view of the relaxation of controls on outbound (and to an increasing extent also on inbound) cross border flows of renminbi, that thinking on efficiency and control also applies to liquidity management processes. Management of RMB can now be centralised and standardised to much the same extent as any other global currency in a multinational’s portfolio of currency exposures.

1 http://www.swift.com/assets/swift_com/documents/products_services/RMB_tracker_February2014_final_sdc.pdf

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Why act now?

In the short term, for corporations without pressing deficit needs elsewhere, centralisation and standardisation of RMB into global liquidity management processes may not appear to yield a substantive monetary return.

But this misses the fundamental point that opportunities exist for payment and invoicing processes, together with associated FX and process risk elements, to be further standardised and centralised. These are important building blocks which augment the efficiency of, for example, just-in-time funding, which in turn increases the degree of mobility and the intrinsic value of internally generated liquidity.

Additional important factors and opportunities to consider here include:

• Growth: the current signs of growth returning to developed markets are likely to increase corporations’ global liquidity mobility needs in support of rising working capital requirements

• Processes: the efficiencies and global visibility achieved by incorporating RMB into existing global processes deliver both risk and monetary benefits

• Relative rates: driven by shifts in supply and demand, the relative position of offshore/onshore rates may change over time. If so, the current return differential of holding RMB offshore will no longer apply

• Investment options: the range and liquidity of offshore RMB financial instruments suitable for treasury use will continue to expand

Growth

There are signs that developed economies are starting to recover:

• In the US, the Commerce Department2 recently reported that the country’s economy grew at a 3.2% annual rate in the final quarter of 2013

• In late 2013, the ECB raised its forecast for 2014 Eurozone GDP to 1.1%, with one ECB board member mentioning the possibility that certain economies such as Austria and Germany might hit 2%3

• More recently, the January Markit Eurozone Manufacturing Purchasing Managers’ Index revealed that manufacturing activity grew at its strongest rate since May 2011, with a rise to 544

• The global situation also appears to be improving, with the IMF predicting global growth will reach 3.7% in 2014, versus 3% in 20135

While these numbers are hardly spectacular, they signal positive growth, which will in turn increase working capital requirements in supply chains as sales activity picks up. The liquidity to fund that working capital increase will have to come from somewhere, and multinationals’ Chinese operations are more likely to have been generating excess liquidity since 2008 than their operations in the US or Europe. Therefore any integration of RMB into global liquidity programmes now is likely to pay dividends later in the efficient and timely self-funding of rising working capital requirements.

Processes

A further motivation for immediate action on RMB liquidity integration is efficiency. As with the currency’s participation in global payments/receivables centralisation programmes during the earliest stages

2 http://www.bea.gov/newsreleases/national/gdp/2014/gdp4q13_adv.htm 3 http://www.reuters.com/article/2014/01/14/us-ecb-nowotny-idUSBREA0D0EL20140114 4 http://www.markiteconomics.com/Survey/PressRelease.mvc/fa8005f424084e018d665383c341ef75 5 http://www. imf.org/external/np/tr/2014/tr012114.htm

of its internationalisation, liquidity integration brings improved efficiency. Global treasury has direct visibility and control of balances, thereby simplifying liquidity forecasting and management. Operational risks are reduced and the management of currency and balance sheet risks is also simplified.

Corporations in the technology, heavy industrial and pharmaceutical sectors have been leading the way in centralising RMB processes. Many of these companies have a standard global process blueprint and continually monitor situations where exchange controls or regulation prevents a currency from conforming with this blueprint. As conditions change (as they have in China) these corporations move the currency onto their process blueprint. In many cases, the situation is aided by the fact that these organisations have significant internal invoicing and intra-group trading flows, which further adds to the efficiency justification.

It is also worth bearing in mind that a liquidity structure is overlaid across payment and collection processes and is expected to evolve and adjust as more sophisticated processes are adopted. As part of its natural lifecycle, a basic liquidity management approach is established where regulations or domestic market practices prevent the adoption of more sophisticated alternatives. Whenever payment or collection processes are not ready to be centralised and need to retain a more fragmented and localised dimension (either due to local market conditions or the corporation’s organisational/technical structure), the appropriate liquidity management technique still ensures optimal cash flow redistribution and consolidation.

When circumstances change so that the re-engineering of payment and collection flows becomes possible, this also enables the design of the liquidity structure to be enhanced. This applies to China, where schemes have been announced over the last 18 months that allow:

• The centralisation of foreign currency and RMB cross-border payments/collections into a pay-on-behalf/receive-on-behalf (POBO/ROBO) model

• The adoption of intra-group trade settlement using netting and a gross-in/gross-out mechanism

HSBC has been the front runner in responding to this sort of change. It was the first bank to:

• Obtain approval from the State Administration of Foreign Exchange (SAFE) to implement a foreign currency netting solution – for a Korean multinational

• Establish a tailor-made gross-in/gross-out RMB cross-border trade settlement solution designed to eliminate foreign exchange exposure and optimise liquidity management – for a Fortune 500 company

The changes implicit in the introduction of the Shanghai free trade zone (SFTZ) only serve to reinforce this argument. Entities based in the SFTZ are permitted to have bilateral RMB cross border liquidity flows, which by allowing the integration of onshore and offshore markets obviously enhances the degree of control and flexibility of any liquidity programme.

Until recently, these bilateral flows were subject to explicit quotas. However, a recent circular (see sidebar “Regulatory update”) from the People’s Bank of China (PBOC) makes no reference to these

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quotas. This seems to imply a move instead towards a controlling limit role performed by banks, where service parameters offered to customers would be determined on the basis of the SFTZ guidelines that a bank is permitted to operate within.

It is clear that the SFTZ is intended as a test bed for financial innovation, so RMB investment, deposit, and interest rate products similar to those offered in offshore financial centres are expected to emerge there first. The SFTZ clearly has the potential to become an international financial hub and a domicile for treasury centres for Asia, thereby enabling further process and risk management centralisation.

HSBC has been at the forefront in developing solutions that leverage the market driven and innovative environment of the SFTZ. One such solution is a recently launched RMB netting programme for a French company’s cross-border intra-group transactions via its subsidiary in the pilot zone, which uses the POBO/ROBO model.

Consequently, even for those with no immediate need to redeploy RMB liquidity elsewhere, there is strong motivation to make it part of globally consistent standards and liquidity processes in the interests of efficiency and strategic flexibility.

Relative rates

While offshore RMB deposit rates are currently less attractive than their onshore equivalent, this situation is by no means guaranteed to persist. For example, the SFTZ high level guidelines cover the liberalisation of capital account items and pave the way for the liberalisation of interest rates on deposits, which will be an important driver for convergence between offshore and onshore rates:

• Capital markets: financial institutions and corporates within the SFTZ are allowed to conduct investments and to trade on the securities and futures exchanges in Shanghai. Offshore parents of SFTZ corporates can issue RMB bonds in onshore capital markets. Trading in ‘international financial assets’ will also be considered, depending upon market demand

• Offshore financing: Chinese and foreign corporates, non-bank financial institutions and other organisations registered in the SFTZ are allowed to borrow both RMB and FCY funds from offshore markets

In addition, FX reform – such as the potential widening of RMB trading bands6 – is another driver for onshore/offshore interest rate convergence, as is the rapid deepening of offshore RMB money markets. This applies especially to Hong Kong, but also to other large international financial centres, such as London.

6 https://www.research.hsbc.com/R/20/rjsk01b

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While this convergence may not be immediate, it provides a strong motivation for corporations that do not need surplus RMB liquidity to cover deficits elsewhere to incorporate their RMB liquidity into a flexible global liquidity strategy. They will then be in a position to respond immediately as RMB onshore/offshore conditions change.

Investment options

The investment options suitable for excess corporate RMB liquidity have continued to grow steadily. While the dim sum bond market has tended to attract a lot of the headlines, there have also been interesting developments at the short end of the yield curve. For instance, early 2013 saw IFC (a World Bank Group member) issue the first CNH-denominated discounted note – with a three-month tenor – under its Global Discount Note Programme.

Innovation in the offshore market has also been supported by the launch of the CNH HIBOR fixing in June 2013. By providing the benchmark for RMB loan facilities and financial instruments, CNH HIBOR is supporting the market for RMB lending and interest rate/hedging/investment products. For example, Bank of China (Hong Kong) has already issued a one year RMB certificate of deposit on behalf of its parent that uses CNH HIBOR as the benchmark rate.

More generally, the evolution and growing liquidity of CNH derivative products, including more exotic options and forwards, means that the basic building blocks for efficiently manufacturing new CNH traditional and structured deposit products are now available.

The expansion of the Renminbi Qualified Foreign Institutional Investor (RQFII) programme into Singapore, Taiwan and London in July 2013 should provide another important step in the evolution of the offshore market, as should the increased RQFII quota for Hong Kong. RQFII products give offshore investors opportunities to invest indirectly into China’s equity and fixed income markets in advance of the full liberalisation of China’s capital account, which will ultimately allow direct and free investment into onshore assets. All of this supports the development of a larger and more liquid inter-bank money market, leading to offshore interest rate conditions becoming more aligned with the onshore market.

Conclusion

For Chinese multinationals expanding their overseas operations, and for other multinationals with significant deficits outside China, the rationale for integrating RMB with existing global liquidity programmes is immediately self-evident. The first group will need global access to their excess RMB to fund their overseas activities, while the second group will need access in order to minimise their global funding costs.

A combination of no immediate need and less advantageous offshore RMB deposit rates has meant that multinationals outside these two categories have tended to defer action. However, this stance misses numerous opportunities including strategic flexibility, process improvement, cost effective funding of growing supply chain activity and enhanced risk management. Considering these opportunities in conjunction with the rapid evolution of the RMB as a global currency suggests that now might be a good time to adopt a more active RMB liquidity strategy.

Regulatory Update

The PBOC issued a circular in late February 2014 that specifies important additional measures supporting the expansion of RMB cross-border usage in the SFTZ. The most significant from a corporate liquidity management perspective, can be summarised as follows:

•RMB offshore borrowing in the SFTZThis measure opens up an alternative channel by which entities in the SFTZ can access offshore funding sources. It builds upon former legislation allowing corporates to borrow offshore subject to a ‘borrowing cap’ rule, foreign debt quotas and regulatory approval. While the previous measures applied to corporations both within and outside the SFTZ, the new measure is specific to SFTZ entities. It introduces different criteria, specifically on borrowing capacity, minimum tenor, and the use of a special purpose borrowing account. However, the most significant differentiator is the absence of restrictions on the lending party, thereby implicitly extending the borrowing source to offshore financial institutions, when previously only intra-group lending was permitted.

•Mutual exclusivityThe existing and new measures appear to be mutually exclusive and therefore will appeal to two distinct categories of corporation: those with internal funding capacity and those who rely on external financing. While the PBOC will still control the amount of inbound financing flows and be able to limit it in the initial phase of liberalisation, the expectation is that this channel will be opened further in the near future.

•RMB two-way cross-border sweepingThe circular covers operational aspects such as the requirement to use a special purpose account and to document the service appropriately between participants. However, the most significant point is the absence of references to loan quotas, which suggests a shift away from this approach to a controlling limit role performed by banks when determining the operating parameters to establish as part of the service offered. These parameters would not require endorsement by the PBOC, but be determined on the basis of the SFTZ guidelines that the bank is permitted to operate within.

•RMB current account, centralised RMB payments and collections in the SFTZThis measure reflects the pace of adoption of best practice in the management of accounts payable/receivable in the SFTZ. The most important change here is that third parties and external entities are allowed to participate in the centralisation of settlements, netting programmes and POBO/ROBO practices.

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The development of the Shanghai Free Trade Zone is creating new trade, investment and financing opportunities for companies doing business with or in China. Denise Zhou, Senior Vice President of RMB Internationalisation at HSBC, considers the unique benefits and services the zone offers and how multinationals can capitalise on them.

The launch of the Shanghai Free Trade Zone in September 2013 marked a defining point in the Chinese government’s intensifying drive to reform the country’s financial systems, starting with the liberalisation and internationalisation of the RMB.

The SFTZ’s location is particularly significant. Covering approximately 29 sq km, it incorporates three existing special zones: Waigaoqiao Free Trade Zone (including Waigaoqiao Bonded Logistics Zone); Yangshan Free Trade Port Area; and Shanghai Pudong Airport Comprehensive Free Trade Zone. In 2012, these three zones reported a combined trade volume of USD113.1 billion. That is approximately 3% of China’s total trade.

Government commitment

Given its timing and location, it is clear that the Chinese government is fully committed to making the SFTZ a success. Backed by Chinese Premier, Li Keqiang, it is the first free trade zone established by the Chinese government. Its launch came as the country’s economy showed the first signs of slowing in over a decade. Evidently, China’s old growth model is no longer sustainable but a new growth model has not yet taken root. Accordingly, the SFTZ is designed as a pilot zone. The experiences of reform that it produces will help to shape reforms in other parts of China, helping to boost trade and create new opportunities throughout the country.

The SFTZ has been hailed as the most important attempt at financial reform since 1980, when Shenzhen, at the border with Hong Kong, became a special economic zone. So, it is not surprising that the SFTZ has attracted so much attention from the international media and global business community. Currently, over 6,000 corporates are registered to operate inside the zone and by February 2014, around 30 banks had also established offices there.

Principal objectives

The Chinese authorities established the SFTZ with two principal objectives in mind: to speed-up domestic reforms; and to act as the forerunner for financial liberalisation.

Shanghai Free Trade ZoneUnlocking new trade, investment and financing opportunities

“First and foremost,

the SFTZ should be

seen as part of China’s

overall strategic plan to

liberalise and open up

its economy further; as

a means to experiment

with reforms that can

support trade and

investment growth;

and − in particular − to

enable financial services

to become a more

powerful driver across

China as a whole.”

“At times, it is easy

to forget that steps

towards adding the

RMB to the list of

internationally tradable

currencies only started

in 2009. By the end

of February 2014, it

was the seventh most

used currency for

payments worldwide

− and the SFTZ is

set to accelerate the

currency’s liberalisation

and internationalisation.”

The zone is already delivering benefits in the shape of new trade, capital investment and financing opportunities for companies doing business with or in the Mainland, as follows:

Creating trade opportunities

The fact that DHL, the world’s largest logistics business, chose to open China’s first truly modern international transshipment centre in the SFTZ testifies to prolific trade opportunities the zone is already creating.

The new facility covers 88,000 sq m and is capable of handling 40,000 parcels and envelopes per hour. Inside the centre, located at Pudong International Airport, cargo from international transshipments is unpacked, sorted and repackaged according to destinations − without having to receive customs checks or pay duties.

Before the centre was opened, such cargo could only be handled in Japan or Singapore. Using the new route could save eight hours out of the three-day journey from the German city of Leipzig to Tokyo compared with the old route via Hong Kong.

Advances of this importance are set to establish the SFTZ as an international hub for cargo transport. Demand for transshipment business in the zone is rising fast and by 2015, the throughput of cargo is set to reach between 5 and 7 million tons annually.

Creating investment opportunities

The SFTZ is also set to play an instrumental role in attracting more investment into China by giving outside investors greater access to China’s markets and industries. Among other measures, this will involve:

Streamlining government to reduce administrative controls

Here, the focus is on exploring ways to establish an administration management system that is compatible with international trading rules and investment standards while consolidating government regulatory procedures to improve efficiency.

Encouraging more open investment focusing on service industries – the six key areasThe SFTZ will gradually open up investment opportunities in six key areas: financial, shipping, commercial, professional, cultural and social services. Encouraging investment will involve suspending or cancelling qualification restrictions for investors and the equity limits within the 18 sub-sectors.

The aim is to establish a management model based on a ‘negative list’ approach for foreign investors in the SFTZ, under which investment is allowed unless prohibited by the government. For projects that are not covered by the ‘negative list’, domestic and foreign investors in the SFTZ will be treated in the same

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way. Although the ‘negative list’ is long − with 190 measures covering over 1,000 items − Shanghai policymakers say it will be shortened.

Promoting China’s competitiveness in technology, branding and servicesThe aim here is to boost trade and help China’s enterprises move up the value chain. Multinationals from inside and outside China will be encouraged to set up Asia-Pacific headquarters in the SFTZ, along with international operation centres for trading, logistics and financial settlement.

Creating opportunities in the financial

services sector and markets

Unlocking the full potential of the emerging trade and investment opportunities listed above can only happen if China opens up its financial services sector and markets – starting in the SFTZ.

Among other steps, this process will focus on five key areas of innovation: interest rate liberalisation; expanding cross-border RMB usage with new services and solutions for corporates; reforming China’s foreign exchange (FX) management regime, creating favourable conditions for a trial of RMB capital account convertibility; establishing a Free Trade (FT) Banking Unit and FT accounts; and making financial institutions more accessible.

When it comes to encouraging cross-border RMB flows, HSBC played an instrumental role in two ground-breaking transactions in this area. The first involved Dover, a world-leading manufacturer of diversified industrial products; and the second involved French multinational Saint-Gobain (see Case Study panel).

As for RMB convertibility inside or outside the SFTZ, there is still no clear roadmap for how this is likely to happen. But, it is expected that

corporates’ investment and financing flows could be a focus during the SFTZ’s early development phases, and enterprises will be able to use both onshore and offshore markets for financing. To accommodate the changes this will cause in the SFTZ, the regulator has been planning adjustments to the FX regime.

Pros and cons

The SFTZ is certainly opening up a world of trade, capital investment and financing opportunities. That said, a number of financial and business professionals are still seeking clarification over the principle challenges and issues associated with the SFTZ and what it was designed to achieve.

When assessing the pros and cons of operating inside the zone, it is important that corporates and financial institutions have a clear understanding of the strategic context and practical implications involved.

For a start, the SFTZ was never supposed to be an end in itself; nor was it designed to trigger a ‘big bang’. Rather, it is a three-year pilot initiative that is continuously evolving and the Chinese government is expected to take a selective approach towards making new financial solutions available to corporates.

It is also worth repeating the key message that the SFTZ is designed to act as a controlled testing ground for reforms across the rest of China. If it succeeds, the learnings and experience it produces will eventually be replicated across other parts of China. As such, the SFTZ is a forerunner that will play a pivotal role in transforming China’s economy into a market-driven economy. This is why corporates and financial institutions should look at developments inside the zone as an indication of how business will eventually be conducted across China.

“Ultimately, the

successful development

of the SFTZ is expected

to spearhead China’s

next phase of growth by

providing a framework

for the rest of the

country that supports

trade, investment and

the real economy in a

sustainable fashion.”

Cautious approach

The fact that the zone is a testing ground helps to explain why the regulators are being so cautious at this early stage. After all, they are looking at a bigger picture with a long-term view on the future of the Chinese economy. Equally, corporates and financial institutions must take care to ensure that joining the SFTZ aligns with their long-term strategic objectives.

For example, there are definite advantages to being one of the first movers into the SFTZ. At the same time, entities with physical operations in the zone are likely to benefit most from these advantages. Then again, moving operations into the zone could be a costly exercise. So, it is vital to weigh cost versus benefits carefully.

Long journey

Finally, some commentators have suggested that the SFTZ poses a threat to Hong Kong or Singapore. In the near-term, this does not appear to be likely. After all, Shanghai has a long way to go before it matches those two centres as the blueprint of a global financial centre.

That said, the long journey towards aligning China with the world’s leading financial centres has now started − and its departure point is the SFTZ.

SFTZ: delivering tangible benefits

Among other benefits, the SFTZ allows, or will allow, multinational corporations to:

• Access offshore RMB and FCY markets for funding options

• Conduct hedging transactions to mitigate risk in the SFTZ as well as offshore markets

• Invest in onshore markets (Shanghai Exchange) and offshore markets with fewer restrictions

• Make more streamlined goods/services trade

settlements • Enjoy greater access to China’s markets and

industries for foreign investors, with more liberalised control over the ‘negative list’ and national treatment

• Simplify FX administration for direct investment since banks are allowed to handle the FX registration process directly for corporates

• At the appropriate time, SFTZ entities will be allowed to exchange RMB and FCY funds deposited in FTZ accounts freely

SFTZ at a glance

Location Pudong, Shanghai

Area 29 sq km approx.

Newly registered corporates 6,600 (February 2014)

Newly registered banks 30 (February 2014)

Key milestones

– 3 July 2013 In-principle approval of General Plan from State Council

– 22 August 2013 Formal approval of General Plan from State Council

– 27 September 2013 Promulgation of General Plan – 2 December 2013 Promulgation of PBOC’s

30 guidelines– February 2014: Promulgation of detailed rules

Estimated lifespan 3 years

CASE STUDY

HSBC pioneers two-way cross-border RMB sweeping from the Shanghai Free Trade Zone

In January 2014, HSBC executed its first two-way, cross-border RMB sweeping transaction from the Shanghai Free Trade Zone (SFTZ) on behalf of Dover, a world-leading manufacturer of diversified industrial products.

Headquartered in Illinois, USA, Dover is a multi-billion dollar, global producer of innovative equipment, specialty systems and value-added services for the industrial products, fluid management, engineered systems and electronic technology markets.

With extensive activities across China, Dover is among the first foreign-invested enterprises to take advantage of this pioneering sweeping service in the SFTZ – and the benefits are already clear.

According to Michael Zhang, President of Dover Asia: “RMB two-way cross-border sweeping means a great deal to Dover Corporation, not only enhancing the efficiency of Dover’s regional cash management, but also significantly improving the company’s Asia operations. It will better support the business expansion of our subsidiaries while also speeding up the process of RMB internationalisation within our group of companies.”

Among other benefits, RMB two-way cross-border sweeping enables multinational corporations like Dover to deploy funds on a pre-set automated basis between their onshore and offshore entities by linking their Mainland and overseas cash pools. It also brings greater transparency to their operations and enhances their ability to optimise their working capital management.

As Helen Wong, Deputy Chairman, President and Chief Executive Officer of HSBC China, comments: “HSBC is actively exploring and developing new financial solutions for customers in the SFTZ in accordance with policy guidance. As the zone’s financial liberalisation continues, companies in the SFTZ will have wider options in financial solutions, such as cash management, funding and settlement, and a greater capacity to manage financial risk.

“HSBC is ideally placed to serve customers in the SFTZ through our global network, cross-border connectivity and international financial expertise. We continue to explore innovative financial solutions under the relevant policies to support our customers’ business growth and the development of the zone.”

Accordingly, HSBC announced in February 2014 that it had become one of the first banks in the SFTZ to launch a centralised RMB cross-border transaction management solution for its corporate clients by delivering the new service to French multinational Saint-Gobain via its subsidiary in the pilot zone. This innovative cash management solution covers functions such as pay-on-behalf and receive-on-behalf (POBO/ROBO) and netting.

Saint-Gobain, world leader in the habitat and construction markets, is now able to centralise payments and collections for merchandise and services trade settlement, along with other current account items, and therefore improve the efficient use of RMB settlements across its group.

“This pioneering service exemplifies the benefits that multinational clients can capture by deploying funds between their onshore and offshore entities through the SFTZ.”

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In August 2013, the Chinese regulators gave the city of Kunshan in Jiangsu province the go-ahead to launch a series of cross-border RMB pilots between the Mainland and Taiwan. Here, we focus on how this important initiative has unlocked new opportunities for Taiwan-based corporates based in the Kunshan Experimental Zone.

In September 2013, Kunshan President Enterprises Food Company Limited became the first company to complete a two-way RMB cross-border intra-group lending transaction between Taiwan and China. This milestone transaction took place as part of the pioneering Kunshan RMB pilot programme, which is designed to streamline the two-way flow of RMB funds between the Mainland and Taiwan.

Conducted through HSBC, the set-up involved gaining approval for a two-way intra-group lending quota totalling RMB1.49 billion using a master account. In the first transaction, RMB10 million was transferred to this master account from its related overseas company.

As a subsidiary of the Uni-President Group, Kunshan President has a long-standing relationship with China. It first entered the Mainland in 1992 and since then it has invested in around 50 companies, primarily in the food industry. Today, it is one of the largest operating entities in the Uni-President Group, with an annual sales turnover of over RMB2.2 billion and a net worth of RMB978 million in 2013. It is also the sales and distribution arm for beverages and instant noodles sold under the Uni-President brand in Eastern China. As such, it plays a strategically vital role when it comes to expanding the group’s penetration in the Mainland.

With its rapid business growth in China, Kunshan President continues to have a strong demand for RMB fundings. But, it has faced significant challenges when its parent company needed to transfer funds from Taiwan to China. The complexities of the regulatory approval process and tight controls over foreign debt quotas meant that before cross-border intra-group lending opened up, funding into China was primarily conducted via capital injection or shareholder loans. Consequently, Kunshan President was not always able to obtain sufficient and timely funding to support its operational activities or investment plans in the Mainland.

Similarly, Kunshan President also had very limited channels to repatriate its surplus funds out of the Mainland. Its options were confined to trade settlements or annual dividends. As a result, Kunshan President was unable to use its surplus funds to support funding shortages in its affiliated companies offshore.

What’s more, some Uni-President Group entities doing business in China still needed bank loans to support their day-to-day operations – and the borrowing costs were high.

In fact, these are common challenges for many other multinational corporates in China, and not limited to Taiwanese corporates.

New options

Thanks to the launch of the Kunshan pilot programme, Taiwanese corporates can now resolve such challenges with new options and opportunities. The benefits are significant. Under specific one-off approval, Kunshan President can now move its RMB funds between offshore and onshore within the approved quota. No additional

A new chapter in China-Taiwan economic cooperationThe Kunshan Experimental Zone

“HSBC’s services will

enable Uni-President

to more efficiently use

RMB funds from its

member companies

in mainland China

and overseas.”

17

18

administrative process is required for individual transactions. This saves a great deal of time and effort, freeing up management to focus on other value adding activities.

At the same time, when required, Kunshan President can also access funding support from other Uni-President affiliates overseas instead of having to rely on costly onshore bank loans. The switch from external to internal funding has reduced financing costs significantly – in this case, by 30% – and greatly improved operational efficiency.

Strategic context

These improvements are exactly the type of benefits that the Chinese authorities intended to achieve under the pilot programme. Indeed, it is important to place the Kunshan Experimental Zone in its wider strategic context. Similar to the Shanghai Free Trade Zone (SFTZ), it is part of the Chinese government’s intensifying efforts to reform the country’s financial systems and transform the national economy through liberalising and globalising the RMB.

These initiatives come at a crucial time for the currency. Although RMB only joined the list of internationally tradable currencies within the last five years, it is now the seventh most traded currency in the world and ranks second when it comes to trade financing. Recently, however, the Chinese economy has showed signs of slowing for the first time in over a decade. The Kunshan Experimental Zone and the SFTZ are specifically designed to reverse this trend by boosting trade and creating new business opportunities.

Kunshan, in Jiangsu Province, was chosen to host the RMB pilot programme on the strength of its thriving economy and its long-standing relationship with Taiwan-based businesses. At present, there are around 7,000 Taiwanese corporates registered in the city. The city’s relationship with Taiwan is so strong that Kunshan is known as ‘Little Taipei’. Its capital intensive and export-led economy relies heavily on continuous foreign direct investment and exports.

“The switch from

an external funding

model to an internal

funding model has

significantly reduced

costs, enhanced the

company’s use of

internal surplus cash

and boosted operational

efficiency.”

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20

Clear objectives

The Kunshan RMB pilot programme has two clear objectives: to further enhance the use of the RMB offshore, specifically in Taiwan; and to encourage RMB flows between onshore and offshore markets.

Among other benefits, two-way cross-border intra-group RMB lending enables corporates to:

• mobilise their onshore and offshore RMB funds more efficiently with greater flexibility;

• optimise group liquidity management to reduce external borrowing and improve return on capital.

This innovative initiative also makes establishing cross-border RMB cash pools a feasible proposition.

In addition, the benefits of the Kunshan pilot programme are not limited to corporates. HSBC recently completed its first cross-border RMB remittance for an individual under another pilot initiative approved for the Kunshan Experimental Zone. In this case, the bank helped an overseas resident in the zone transfer RMB positions to his RMB account in Taiwan. This cross-border RMB remittance service, under the personal current account, provides greater convenience to Mainland residents, Hong Kong, Macau and Taiwanese customers, as well as foreigners, in the pilot zone with cross-border remittance needs.

The new services trialled in the Kunshan Experimental Zone provide a channel for the repatriating Taiwanese corporates’ fast-growing RMB surpluses while offering new opportunities in RMB services for banks in Taiwan. As a result, Taiwan’s emerging offshore RMB market has received a boost and the new policy will make cash management more convenient and efficient for Taiwanese companies.

Comprehensive solution

Kunshan President was advised about the new service by HSBC, its core bank, shortly after the official regulation announcement. The corporate has been banking with HSBC in Taiwan since the 1990s. When it expanded into the Chinese market, it also established a relationship with HSBC China in 2006. Among other services, HSBC has provided working capital support to the group’s subsidiaries in the Mainland.

In this case, HSBC helped facilitate communication between Kunshan President and the Kunshan People’s Bank of China (PBOC). The bank also presented a detailed analysis of the pilot programme’s pros and cons to Kunshan President and its parent in Taiwan, as well as a detailed implementation plan. Overall, HSBC’s efforts gave Kunshan President an increased comfort level and confidence in adopting this new solution.

Established trend

Looking ahead to how the Kunshan pilot programme might shape the future of China’s business landscape, the gradual opening up of the country’s economy is likely to become an established trend and the flexibility of cross-border fund movements is likely to be replicated nationwide. This will enable more entities across China to enjoy the same benefits as Kunshan President.

As a sector leader in the Chinese market, the Uni-President Group is glad to have played a role in the country’s recent financial reforms. It will continue to work closely with HSBC to monitor developments and stay abreast of any new initiatives that will further improve its management of group cash.

Kunshan at a glance

• Registered population 680,000• Area 921.3 sq km• Heads the list of Top 100 Best Developed

County-Level Economies in China• First county-level city with a GDP exceeding

200 billion yuan• Significant local industries include electronic

information, precision machinery, fine chemicals, digital products, software, semiconductors, and communication equipment

• Holds numerous awards including Excellent Tourism City of China, National Garden City, National Model City of Environment Protection, and National Hygiene City

C H I N A

Kunshan Shanghai

Hong Kong

Beijing

Taiwan

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Creating a Greater China cash management strategy

Despite the publicity surrounding the internationalisation of the renminbi (RMB), a significant number of corporations continue to postpone the development of their cash management strategy for Greater China. Typically, this is because treasurers and finance directors believe there are still many technological and infrastructure hurdles to make the process worthwhile. But as Lewis Sun, Head of Sales China, Global Payments and Cash Management at HSBC explains, this assumption is no longer correct and implementing such a strategy now can reap substantive dividends in terms of both local and global working capital efficiency.

While China’s various RMB deregulation initiatives have held most of the limelight, behind the scenes other important changes have been taking place. The technical obstacles that have previously hindered efficient cash management across Greater China have been quietly disappearing. While it is not yet possible to achieve the level of domestic cash/liquidity efficiency attainable in regions such as North America or Europe, the gap is closing to the extent that immediate action can still deliver tangible financial benefits.

Rapid deployment of global standards

An obstacle that previously hindered the incorporation of China within existing global corporate cash processes was standardisation – or rather the lack of it. For instance, the current SWIFT XML format did not exist when the original version of China’s Real Time Gross Settlement (RTGS) clearing system – China National Advanced Payment System (CNAPS) was being developed. Therefore the People’s Bank of China adopted a version of existing SWIFT MT messaging that supported double byte characters, which became known as ‘Chinese MT’. Unfortunately the use of

double byte characters meant that this messaging could only be used domestically, not internationally1. In addition, there were limitations on how corporates and others could use the messages’ unique fields to capture the information they needed to reconcile their bank accounts systematically.

These limitations will no longer apply after 2014. CNAPS II, which will gradually replace the original CNAPS system during 2014 and be fully live in Q4, will be entirely compliant with SWIFT XML, which supports double byte characters anyway. Therefore all the unique field capabilities that are used for capturing reconciliation data will also be fully compliant. The net result is that all SWIFT messages sent via CNAPS II will be globally compatible, so straight-through-processing for both accounts payable and accounts receivable will be readily achievable.

Some major multinationals have already moved to reap these benefits – and not just foreign multinationals. For example, while SWIFTNet is being used in China by multinationals as a global link to control their onshore cash management, it is also finding favour with some Chinese multinationals for their global cash management. The bank-agnostic nature of SWIFTNet is seen as particularly attractive in this context as a means of streamlining processes, while not being tied to a specific bank and its technology. What is also striking is the speed with which Chinese multinationals are responding to the opportunity. When one considers that SWIFTNet is a technology previously used by perhaps five or six hundred of the largest global multinationals, the speed and efficiency with which some Chinese companies have adopted it is remarkable.

1 Prior to the introduction of SWIFT XML, MT messages were transmitted in a method similar to telex, with the last digit being used for zero-sum checking and therefore effectively meaningless in data terms. However, in the double byte ‘Chinese MT’ messages, the last digit was meaningful – thereby creating a conflict.

Corporate technology and processes

The increasing efficiency available in cash management technology and processes is now replicated more generally elsewhere in China. Recent years have seen major progress in the technology used by corporations in China, with many multinationals now using the latest versions of major ERP systems there.

This has gone hand in hand with similar progress in accounts receivable reconciliation. Previously the emphasis was primarily on receiving payments as quickly as possible, but nowadays the focus is far more on accurate reconciliation for credit control and accounting purposes. Companies have realised that performing this reconciliation by having multiple personnel calling up every customer that sends a payment to find out which invoices it covered is not the only possible method (let alone being highly inefficient). There has therefore been a switch towards maximising automated reconciliation within the ERP or accounting system, with personnel just focusing on exceptions.

This growth in processing efficiency and automation has been accompanied by the rising popularity of shared service centres. Corporations entering China typically set up multiple legal entities and it clearly

makes sense to have one expert team managing the accounts receivable and payable processes for all of these under one roof.

These various improvements in corporate cash management technology and processes also mean that China now has a pool of skilled finance personnel accustomed to working with the technology and methods familiar to multinationals in other regions. Therefore, enhancing technology and processes for Greater China cash management no longer runs up against a skills shortage.

Enhancing onshore liquidity management

While there has recently been considerable regulatory change regarding offshore RMB liquidity management, this has not been mirrored domestically. Currently the only permissible way of performing onshore RMB liquidity management remains the use of an entrusted loan structure. The downside to this is that in China there is a business tax charge levied on each loan made within a structure: normally 5%, plus a 0.1-0.5% local surcharge that varies from city to city. For example, if using a standard zero balancing approach, a cash rich entity would lend its surplus to the header account, which would in turn lend to a cash poor entity – but unfortunately for tax purposes this would count as two loans and attract an assessment of tax twice over.

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At first glance, for corporations running multiple legal entities with fluctuating balances, this may seem to be a substantive reduction in the benefits possible from creating a China cash management strategy. However, an alternative technique that can legitimately (and considerably) reduce the tax charge is a tax-optimised structure, sometimes called ‘horizontal sweeping’2, as offered by HSBC. Instead of all cash rich entities loaning to the header account and funds being redistributed to cash poor entities, horizontal sweeping takes a more discerning approach.

It calculates the optimal way to transfer funds among cash rich and cash poor entities while minimising the number of loans. Any funds moved only pass through a dummy account at the bank (not a header account) which is not deemed as an additional loan and therefore automatically reduces the number of taxable loans by at least 50% compared to a zero balancing approach. The administrative overhead from the corporate perspective is negligible, as all the system set up and reporting is provided by the bank and once up and running is completely automated.

The reduction in tax charges achieved by horizontal sweeping maximises an important benefit by reducing unnecessary borrowing. This is especially significant in the current onshore lending environment, where external liquidity sources are already expensive and becoming more so (even for well rated companies). Furthermore, apart from the domestic liquidity benefits,

horizontal sweeping also opens the door to efficient up-streaming of liquidity to regional or global liquidity management structures.

Reshaping cash management: B2C

One of the most notable changes in the Chinese financial landscape recently has been evolution of consumer payment channels based upon the latest internet and mobile technologies. Corporate cash management in China is no longer just driven by the business to business infrastructure. Third party payment agents have transformed the landscape by providing a highly efficient and centralised method of collecting mass consumer payments, both online and offline – a point not lost on global retail consumer brands.

The attraction of third-party payment agent platforms is that they provide a highly efficient and transparent means for collecting from individuals, thus allowing all retail collections to be consolidated into a single coherent electronic channel. The costs and inefficiencies associated with processing cash and cheque payments are avoided, and there are also advantages over running card payments in house. On third-party agent platforms in China, customers’ debit/credit cards are linked to their mobile phones, so there is no need for consumers to carry their cards with them, nor type in card and verification numbers, which reduces the barriers to making and paying for purchases.

As a result of these various advantages, it is now increasingly common to see retailers in China establishing their e-commerce

2 For an example of a practical application of this, see “AkzoNobel: optimising cash management in China”

platforms from the outset using just a third-party agent to process customer payments. Such services have also been rapidly expanding to more service industries such as catering, entertainment, taxis, etc.

Greater China

A further convenience that aids the creation of a cash management strategy for Greater China is the tighter integration of the constituent territories. For instance, there is now a high degree of interaction among mainland China, Hong Kong and Taiwan. Even trading companies with their primary presence and large trade volumes in Hong Kong and Taiwan have growing engagement with counterparties in mainland China, be they inter- or intra-company transactions.

Therefore many multinational corporations no longer look at their treasury or cash management team for mainland China as being just for the mainland. It is increasingly common for their cash management or treasury teams based in perhaps Shanghai or Beijing to service all of the

countries and Special Administrative Regions in what is commonly referred to as Greater China, i.e. mainland China, Hong Kong, Macau and Taiwan.

This greater cohesion has become possible because of the advances in technology and processes mentioned earlier. Previously when technology was limited and processes were manual (and probably also specific to each location), it would have been next to impossible to manage the entire market under one roof. Now, assuming all the business entities/locations are using the same technology, the shared service centre managing their transactions could be located anywhere. (Though for various reasons including costs, personnel availability and state incentives, certain locations in mainland China are becoming increasingly popular.)

Interestingly, the benefits of this Greater China model can now also extend into the B2C payment space. Chinese third-party payment agencies are keen to deploy their technology overseas and this increasingly

involves Hong Kong and Taiwan, as well as mainland China. The potential efficiencies of this expansion even apply at the currency level, as it is now possible to place orders online denominated in RMB in Hong Kong and Taiwan.

Choice of bank

Choice of bank has an appreciable influence on the benefits achievable from a Greater China cash management strategy. Apart from a willingness to innovate, another important consideration is willingness to invest in technology and infrastructure that works consistently across China as well as globally. For example, is the bank fully SWIFTNet capable? Can it automatically capture accounts receivable data and support the latest SWIFT XML bank statement format for automated reconciliation? Can it offer automated accounts payable processing based on the new SWIFT XML format? Any gaps in these areas will materially impact the benefits a corporate can achieve from its cash management strategy in Greater China.

Conclusion

Many corporations still regard Greater China as an exception from a cash management perspective that requires non-standard treatment. The assumption that this is necessary on the grounds of infrastructure and technology is no longer correct, as China is now enhancing its financial infrastructure and adopting all the latest financial technologies that would be available in any mature market. At the same time, a pool of skilled staff familiar with these technologies and associated processes is also developing in parallel with locations particularly favourable to shared service centres.

Furthermore, the regulatory changes of the past couple of years also mean that Greater China no longer stands in isolation. To a large extent, it is as accessible as many developed markets from a global liquidity management perspective – which only makes the argument for creating a Greater China cash management strategy that can be linked into a global context all the more compelling.

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Historically, AkzoNobel’s corporate treasury has had little direct involvement in the company’s cash management for its business entities in China, usually only becoming involved if there was a funding or FX hedging need. However, as Jessie Li, Greater China Treasury Manager at AkzoNobel explains, since 2010 the company has radically enhanced its cash management in China to deliver significant value to the corporation.

As a global leader in paints and coatings and a major producer of specialty chemicals, AkzoNobel has operations in 15 countries in Asia (including 35 legal entities in China) and in recent years has grown extensively, including through acquisitions. Over time, this resulted in an accumulation of diverse financial processes and ERP systems, which in turn caused duplication of activities and sub-optimal management of cash. This meant that the company was incurring unnecessary borrowing and administrative costs, as well as expanded risks arising from non-standardised processes.

Optimising cash management for such a complex business would therefore be challenging enough in developed markets, but the evolving regulatory landscape in China made such an objective even more demanding. Nevertheless, AkzoNobel’s China treasury management team has managed to deliver important cash management enhancements, including an innovative, highly tax-efficient pooling structure (domestic RMB) and the introduction of core payment factory functionality onshore. In both cases, these successes were facilitated by the process and standardisation improvements delivered by two AkzoNobel global projects:

• Global Treasury Transformation – a complete restructuring of banking relationships, the treasury control framework, global cash management infrastructure and policies (the project started in 2007)

• One Finance – development of a global standard chart of accounts and the consolidation of all corporate ERP systems

Both of these projects have already had a material effect on the value that treasury is able to deliver to AkzoNobel in China. For instance, while the company had a banking relationship with HSBC dating back to 2005, the global treasury transformation project resulted in the deepening of this relationship in Asia and the opportunity to enhance AkzoNobel’s onshore RMB liquidity management.

Innovative pooling for maximum value

A first generation cash pooling structure had been in place with HSBC since late 2005, primarily for working capital support. As such, it was not tax-optimised and therefore incurred tax charges on all intercompany entrusted loans within China (which are currently the only permitted way of establishing onshore intercompany pooling). In its original incarnation, the structure used zero balancing, with all surplus funds from cash-rich entities being swept to a concentration (or header) account from which they were then transferred to cash-deficit entities. As all transactions into and out of the header account were classified as intercompany loans (with tax of 5.6% assessed on all of the interest paid), the tax cost was significant.

AkzoNobelOptimising cash management in China

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However, as part of HSBC’s proposal to assist AkzoNobel’s global treasury transformation project in Asia-Pacific, the bank introduced a more tax-efficient horizontal pooling structure1. This would consist of loans made directly by cash-positive to cash-negative entities, rather than via a header account. Any remaining surplus after all deficits were covered would then be swept to the header account. By avoiding a round trip through the header account for all transactions, this would minimise the number of intercompany loans being made, while also reducing the interest expense and tax payable.

Nevertheless, implementing the new structure involved considerable effort and teamwork between HSBC and AkzoNobel’s China treasury, because of the scale of AkzoNobel’s business. For instance, 38 bank accounts were involved, when the largest implementation of horizontal pooling by HSBC before this had involved only eight.

Operationally, AkzoNobel’s previous structure was relatively simple from an account booking perspective because all participants could simply book their intercompany positions against the pool header account (and entity) because they were all either borrowing or lending from that single account. However, under the new structure’s ‘many to many’ model, some 18 cash-deficit entities were usually borrowing from 20 cash-positive ones, which resulted in thousands of entries per day. With the ERP rationalisation still ongoing in China, automated booking arrangements were not possible, but this was resolved by having entities adopt an aggregated booking philosophy at the end of each month.

The new structure went live successfully in April 2012. HSBC provides Jessie Li’s team with both daily and monthly reporting of all transactions and by minimising the number of intercompany loans the new arrangement has reduced the amount of business tax liability by 48%. As AkzoNobel’s operations and cash pool in China grow, the monetary value of this saving will also scale accordingly.

Global payment factory

The Treasury Transformation and OneFinance projects have also provided the necessary solid foundations for AkzoNobel’s global Payment Factory (PF) project, which started in August 2011. One of the outstanding aspects of the PF project has been its implementation

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1 For further detail, see “Creating a Greater China cash management strategy”

in China. Unlike regions such as Western Europe, payments or receivables made/received on behalf of other entities (POBO/ROBO) are not permitted in China. Nevertheless, despite having to comply with this regulation, AkzoNobel has managed to achieve many payment factory efficiencies for its onshore payments.

The PF process that AkzoNobel has adopted for China is broadly similar to that used in less regulated markets, but instead of payments being made on behalf from AkzoNobel N.V.’s own accounts, they are paid from the individual entities’ own bank accounts. However, the supporting activities are standardised and effectively controlled by AkzoNobel’s Asia-Pacific regional treasury team in Singapore.

Business entities perform payment runs from their local ERP systems and the payment files created are automatically sent to the regional treasury’s SAP system, thereby enabling straight-through-processing. The entities then

view and approve the payments on the Treasury SAP system, which are then sent to the appropriate cash management banks via SWIFTNet. In the case of China, the payment factory is therefore effectively functioning as a payment forwarder.

While this arrangement enjoys the advantages of standardisation and automation, there are also additional benefits. For instance, MT940 bank statements are delivered to AkzoNobel’s Treasury SAP system, which in turn processes and sends them to the individual entities’ SAP systems, where they can then be used for automated bank reconciliation.

Innovative banking

Both the payment factory and onshore pooling are instances of the close collaboration between HSBC and AkzoNobel treasury. HSBC has provided comprehensive support and resources, including dedicated implementation, technology and service teams, working closely in conjunction with the HSBC relationship manager and cash management advisors. The bank was actively involved in training AkzoNobel’s financial controllers across China to help them understand its new onshore cash pooling arrangement, as well as for the rollout of the payment factory and the global transformation projects.

At the same time, HSBC’s willingness to invest both capital and intellectual resources has delivered value to AkzoNobel. The innovative horizontal pooling structure is one example of this, the bank’s early and continued investment in SWIFTNet to accept and process XML v2 (and now also v3) formatted files is another.

Conclusion

While AkzoNobel’s cash management strategy in China has already delivered significant value, one of its most noteworthy features is the future proofing of the solutions. The current structures and processes can be readily adapted as circumstances change. For instance, the current China payment factory arrangement can be quickly adapted to a full POBO model should regulation allow this. And the company’s onshore cash pool could in due course be readily integrated into its global liquidity management model.

These cash management achievements in China would be impressive enough in isolation, but the fact that they were also accomplished against the simultaneous backdrop of multiple global treasury projects is all the more remarkable.

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