Cash Management: Negotiating China Part II

In the second part of this article, we conclude that WTO entry will not solve all of China''s cash management problems.

While recent liberalizations of the system and amendments to the law make it easier to operate a treasury in China, setting up a cash management centre on the Mainland is not a trouble-free game and it is unlikely that the country's entry into WTO at the end of the year will make it instantly more efficient. Many of the problems that FinanceAsia explored in an article on cash management in its February edition this year still exist.

A mainly paper-based system means there are still delays in payments and collections. Poor inter-bank communications make verifying transactions between counterparties difficult and all foreign exchange dealings are still closely monitored by the State Administration for Foreign Exchange (SAFE). 

There has also been little progress on the provision of more renminbi licenses for foreign banks. Shanghai and Shenzhen remain the only cities in which renminbi dealings are allowed - although new rules permit banks to service surrounding provinces from these branches. Banks expect the next city on the list to be Tianjin, but this is speculative - the government has given no indication of a timetable for new licenses. The continued non-convertibility of the renminbi also means that companies are still inclined to keep their profits from Chinese exports in offshore bank accounts in Hong Kong and Singapore.

The authorities have, however, taken a more pragmatic approach to inter-company dealings. When foreign companies first opened shop in China they often had to register a number of subsidiaries to carry out different parts of the business. Regulations prohibited borrowing and lending between these subsidiaries, making payment and collection reconciliation troublesome. Seeking ways to get around this problem, one foreign company recently set up its own bank in order to handle inter-company payments.

But says Webb at HSBC: "Licenses to establish an in-house bank have not been given lightly. It remains to be seen how viable it will be for other foreign companies to adopt the same approach." Instead, companies are consolidating their interests under a holding company structure in order to meet their cash management requirements.

Progress has also been made on the nationwide renminbi payment system introduced by the People's Bank of China (PBOC). At the outset in 2000, only about 20 cities were connected to the Electronic National Interbank Settlement System. Now that number is over 700 and almost 20,000 bank branches are connected.

"There are still some limitations in terms of automation," comments Hinton at Standard Chartered, "but it's definitely improved the efficiency of sending payments and the certainty of receiving payments from around the country. It still lacks an import/export function that would allow us to process on a straight through basis and to send detailed information to our customers electronically, which they can then upload into their accounting systems, but we are working on that."

Shirley Chan, head of cash management for China and Hong Kong at Deutsche Bank, says the key to overcoming the difficulties in China is to improve the information flow between banks and their clients and clients and their customers. "The biggest concern is on the collections side," says Chan. "Trying to work out who has paid their bills is a challenge when payments appear without any indication of who has sent them."

Jaggard at Bank of America says this leads to a high rate of failed transactions. "Once a cheque has been received and entered into a lock-box site and the payment goes to the clearing system, then the chances of a failure are quite limited," he says, while adding that a lot of payments sit in no-man's land waiting for reconciliation.

Banks are hoping that new web-based cash management systems will help to improve the situation. So far HSBC is the only bank to have received approval for its Hexagon platform in China. The other banks have applications pending with the People's Bank of China following a recent ruling that all web-based platforms must be approved by the authorities before being rolled out to customers.

The platforms allow customers to monitor intra-day payments, review accounts and initiate transactions. "The most important thing is for these platforms to have local language capabilities and also support English, making them bilingual," says Anand Pande, head of e-business, cash and trade for Citibank in China, who is hoping to launch his online product in the next two months. "The system won't simply allow customers to monitor their transactions, they will be able to upload files onto the web from their ERP systems and they will be able to initiate transactions and get collection reports."

Straight through processing of transactions, even with the expansion of the PBOC's electronic settlement system, is still fairly limited in China. While 90% of payments in developed markets like the US are done without touching human hands, there are very few of these transactions in China.

 "There are some dollar payments that are processed straight through, but due to foreign exchange regulations the banks must take a hard copy of these transactions to show the SAFE - so it is not entirely paperless," says Jaggard, who says the speed of transactions in the country depends entirely on how many layers there are in the payment and collection process. Companies with distribution operations spanning several provinces will wait longer for payments and will have more difficulty reconciling collections than those companies with a single manufacturing hub.

At the end of the day, efficient collection systems rely on strong distribution and, for this, the foreign banks depend on their alliances with local banks. Most of the big players have set up service level agreements with the big four banks, including Agricultural Bank, Bank of China, Construction Bank and ICBC, which gives them access to about 26,000 branches.

The agreements range in functionality. Some allow the foreign banks to use local branches for cash collection services and cash and cheque deposits. Others authorize the local banks to provide acceptances on renminbi drafts on behalf of the foreign banks. The arrangements work well for foreign companies with large cash collection needs across several provinces, in particular retailers like McDonalds.

"Making these agreements really work has been a long and often difficult process," says Hinton at Standard Chartered, who says the local banks are careful not to give away too much. "A lot of the time we are asking them to do things that will benefit us and our customers, but the key is to structure the arrangements so that all parties benefit."

Managing these relationships will be a delicate process as the foreign banks make headway in China. Multinational companies that want efficient cash management solutions are likely to become more demanding as their businesses grow. The challenge for the banks is to provide these services while working within a legally restrictive framework and with local banking partners who are eager to protect their markets. China's entry into WTO promises to make life a little easier, but the road ahead is long and will require a lot of patience.

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