An MNC treasurer speaks about obstacles in China

Parochialism and inadequate IT infrastructure harm the ability of Chinese banks to provide treasury solutions. They will have to improve by 2007, when western banks will be able to compete freely.

Kimberly-Clarke's treasurer refuses to adjourn the meeting to the John Bull Pub in Beijing's diplomatic quarter, a tempting quarter-mile down the road. This is unfortunate for FinanceAsia's thirsty correspondent.

And I remain convinced that the frustration Mei Tong shows at the obstacles she encounters in the course of her duties would have benefited from some form of liquid relaxation.

If you want a parallel to treasury management problems in China, you need look no further than the creaking, filthy, underpowered Xiali cab that just about succeeded in depositing me at the Kimberly-Clarke office.

In Shanghai, taxi drivers drive the relatively high-powered Santana 2000, the product of VW. VW has its factory churning out tens of thousands of cars some 15 kilometers outside Shanghai, on the road to Suzhou. Xiali's factory is in Tianjin, an hour's train ride from Beijing. Local protectionism means Beijing sticks with its Xiali while Shanghai shows off, in its usual manner, with the smart Santana.

Similar parochialism across China's sprawling landmass means banks tend to be very slow to talk to each other when transactions involve different members of the big four state banks. Indeed, even when the banks belong to the same organization but operate in different parts of the country, coordination can be difficult.

The common feature of such reluctance is that banks in China are still rewarded by the amount of deposits they accumulate rather than by the customer satisfaction they provide. Therefore every branch in China wants to hang on to collected funds for as long as possible - to the hair-pulling dismay of such capable treasurers as Mei Tong.

Kimberly Clarke's problems are compounded by the existence of numerous subsidiaries, 100% owned by the holding company.

"Every singly entity sells its product as an individual entity, so there's no genuine centralized logistics, and marketing function, let alone cash management," says Mei Tong.

The problem lies with the absence of a genuine holding company concept in China. Even though the holding company owns the entities, it has no right to shift cash around, irrespective of whether one entity is cash rich and the other deeply in debt.

However, there are ways around this situation.

"We could make a deposit with an agent bank which then lends out the money to the needy entity," says Mei, but she points out that using such an agent inevitably adds costs, financial and bureaucratic, to what would be a routine transaction in developed economies.

Mei Tong's solution has been to build her own parallel cash management network, at considerable cost and inconvenience.

She explains that the subsidiaries although they in fact have equal legal status with the holding company - sell all their products directly to the holding company. The holding company then sells to the customers and is responsible for collecting receipts. Kimberly-Clarke uses different payment terms, such as prepayment to cash-poor entities, to spread the money around.

"But this was a painful process, since we has to restructure all the payment channels in China," she says.

But Mei Tong's problems don't stop at cash management.

"We're faced with lots of side issues in dealing with Chinese banks. Sometimes we have to galvanize the banks to provided us with solutions."

One example is that when funds do come in and get credited it to the company's account, there's no accompanying information as to who actually paid the funds.

"The information as to who the payee is usually comes in three to four working days later - and even then we have to go the bank and inspect the written message which informs you where the funds come from. So you're never sure when you have dozens of collections in a single day, who you have to chase up and who you leave alone," says Mei Tong.

The situation is particularly difficult when for example the International and Commercial Bank of China in Sichuan sends funds to Bank of China in Beijing - both in terms of the timeliness of the cash ending up in the Kimberly Clarke account and in terms of information on who paid.

"ICBC will tell us they have sent on the money, but then we have track down where it is within the BoC organization."

This is related to the patchy coverage of the People's Bank of China's settlement system. Only banks in the big cities would have the technology to interface with the settlement system, but even here perhaps only a single branch has links with the settlement system. So the branch with the cash receipts must first transfer, often manually, the funds to the branch with a link to the settlement system. Using the settlement system costs the branches, so they are reluctant to use it, reducing the transparency and speed of inter- bank transfers.

There are ways around even this for the resourceful treasurer.

"We first find out where our payees' bank, and then set up collection systems with the same bank, which reduces the onerous inter-bank transactions. In addition, we lean on the bank to keep us up to date with emails and faxes to our credit department at head office. Then we release the goods to the customers as soon as we get the information. That's important, since many of our legal entities have to pay in advance for the goods - so if there's a delay in the bank notifying us, the customers get very peeved."

So to what extent does Kimberly-Clarke use the foreign banks, chomping at the bit to get involved in the China market?

"We do rely on the big global banks such as HSBC and Citibank, since they are our global partners. The local banks insist on a standby letters of credit from one of the global banks when we apply for working capital loans. The latter can access our global credit rating, which BoC, for example, does not have."

Since foreign banks, unable to collect retail RMB deposits, must borrow a proportion of their funds on the Chinese inter-bank market, RMB loans from the local banks are generally cheaper. As such, the local banks are an important source of funding to MNCs.

The foreign banks also have state of the art cash management systems, but usage of this is frustrated by the limitations on the number of foreign branches allowed to deal in RMB. Foreign banks are restricted to a tiny number of branches in China's leading cities. This means their branch coverage, even within the cities where they are allowed to carry out RMB business, is inadequate for companies that have operations all over the country. For example, a Kimberly-Clarke entity would need a bank which has a sufficient number of branches to satisfy the payroll requirements of its workforce, and a bank which can communicate with banks in other locations. Having a large number of branches is a crucial requirement in an environment where IT systems are so undeveloped and so many transactions are done manually. In contrast to the stunted foreign banks, Chinese commercial banks have tens of thousands of branches all over the country.

So will Mei Tong be running for the exits of the Chinese banks and into the welcoming arms of the foreign banks when the latter have the freedom to set up branches anywhere they like?

"The Chinese banks have definitely improved over the last few years. They are being more proactive in coming to us, and they are slowly building up a global credit profile of Kimberly-Clarke. But as an MNC there's a compelling logic to acting with our global partners. On the other hand, foreign banks have much higher costs than their local competitors."

The Chinese banks have been warned. They have till 2007 to improve their services and provide their corporate customers with the cash management and treasury systems they need.

As I squeeze into the back seat of the Xiali on the trip home and arrange my knees around my ears, I wonder how likely it is they will meet the challenge.

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