While treasurers around the region fit storm windows to their companies in preparation for the impact of world conflict, those running foreign companies in China seem a lot less pessimistic these days. Probably because they have been fighting their own localized war for the past decade: a battle to make profits in a country where poor infrastructure, bureaucratic roadblocks and a healthy dash of xenophobia make corporate life a daily chore.
"Two and half years ago when I visited clients in China and asked them about business, they would hang their heads and say 'Well, we are in it for the long haul'," says Richard Jaggard, senior vice president of global treasury services at Bank of America. "Now the mood is very different. Their businesses are growing and profit prospects look good."
Foreign companies with manufacturing hubs and export businesses that have stuck it out in China are now reaping the benefits. The country has shown growth in commercial volumes this year while most other markets in the region are off by between 15% and 20%. China's entry into the World Trade Organization (WTO) at the end of this year should further boost its position.
For the banks offering cash management services to foreign companies operating in the country, the spectre of WTO membership brings some interesting opportunities and challenges. Most significantly it will allow them to deal with local companies. From the day China enters the club, foreign banks will be able to open foreign currency accounts for local companies. After two years, this will be followed by renminbi accounts for local firms, and within five years personal accounts for individuals.
"Current restrictions on foreign cash management providers mean that we can only deal with foreign companies or those Chinese companies with listings offshore," says Lawrence Webb, head of payments and cash management for HSBC in the region. "But now a few of us are starting to talk with state-owned enterprises (SOEs). These are big companies with sophisticated cash management needs. Particularly in the light of WTO, these companies are moving forward and are ready to partner with global banks."
The banks see potential in different customer segments, but most will be focusing on large corporations. Webb believes the greatest opportunity lies with SOEs in the throes of privatization. Tim Hinton, head of local product management for Asia at Standard Chartered, agrees but says there is also potential from an increase of M&A deals between local and foreign firms.
"Shortly after WTO, we expect to see some loosening of the foreign ownership ceilings and restrictions in the corporate sector," he says. "This could include outright overseas acquisition of local SOEs and SMEs for the first time - but only in certain industries. Such a change will obviously lead to more business opportunities for the foreign banks and we stand ready to service these new companies."
Others see more potential in the increased number of foreign companies expanding their interests on the Mainland. Jaggard at Bank of America says it will take some time before dealing with SOEs becomes viable. "Over the long term SOEs will become our customers, but in the short term our plate is full with US and European companies investing in China." Steve Groppi, regional executive for treasury services in Asia at JPMorgan, concurs.
"In the next 12 months the biggest opportunity will lie in foreign direct investment from the United States, Europe, Asia and specifically Hong Kong and Taiwan. At this stage the SOEs are a little out of reach because of the time it will take to complete the privatization process. However, there's a lot of momentum in the SOEs as it relates to electronic banking and treasury management."
One sign that corporate treasurers are beginning to get serious about China is a readiness to set up shared services centres (SSC) and regional treasury centres (RTC) in the country. Once considered a place that was too difficult to operate in, multinationals are now taking a closer look, particularly at Shanghai. "While Australia, Japan and India are often excluded from RTCs for geographical reasons, China was excluded because it was considered too hard, but this is changing," says Webb.
He says the importance of the Chinese market in regional expansion plans and better access to professional staff has made it an obvious choice. "It now makes sense for these companies to put their treasury centres right in their biggest market." Alcatel as well as Tricon, owner of fast food chains KFC and Pizza Hut, are two companies that are now running regional offices from Shanghai. Compaq and Shell are also known to be establishing SSCs in China. Compaq's centre will centralize payments and collectables for greater China.
The next challenge for the cash management banks will be setting up RTCs or SSCs in cities other than Shanghai, as companies want their cash centres as close to their manufacturing hubs as possible. Guangdong is a popular choice for manufacturers while Chengdu in the western region is increasing in importance for technology companies. Very few of the large cash management banks have licenses to operate in these cities and rely on their alliances with local banks to service clients.
The shift in preference for service centres based in China will be a blow to Singapore which, up until how, has been the favoured destination for RTCs. Singapore's Southeast Asian zip code puts it in the middle of a region where short- to medium-term growth prospects are few. Once companies make the move to China, it will be difficult for Singapore to win these services back. And it is not a question of price. China's new-found popularity as a hub has triggered a sharp increase in operating costs in recent months, no longer making it a cheap option.
The shift of shared service centres and regional treasury centres illustrates a general change in the attitude of companies towards their cash management operations in Asia, says Groppi at JPMorgan.
"A few years ago there was a lot of naivety amongst banks and companies that thought they could emulate a European or American structure by picking one bank to service their needs throughout the region," he says. "Companies now realize that no one bank can service them in all markets and that they need a bank that has a strong network of partners." Some examples of this are UTC, owner of the Carrier Group, and tobacco company Philip Morris, both of which use different banks for different markets.
(This story continues as Cash Management: Negotiating China Part II)
