Cross-border growth among the region’s large local companies is driving many to centralise their treasury operations into regional treasury centres (RTCs). The rationale is straightforward: it can reduce processing times, simplify fund flows and avoid unnecessary duplication.
But attitudes about what is involved in the centralised treasury centre in the region are by no means uniform. In Japan, for example, corporate culture tends to regard treasury as more of an offshoot of the accounting department rather than as a centre for risk mitigation. But even among firms that fully embrace how much power a treasury centre should have, many don’t want to spend on the technology even if they are prepared to bankroll the cost of additional staff. Instead, such firms are content to continue using spread sheets until the business case to buy into a work station, which could cost upwards of $500,000 when the license and annual maintenance costs are included, becomes undeniable. “Emerging market firms often understand the cost of the people side of it, but the question is do they buy a treasury work station or invest in the technology to support it?” said one banker. “From my perspective the jury is still out on that. There are still a lot of global multinationals that won’t deploy a treasury works station into their Asian treasury centres.”
However, according to Wes Bernard, executive vice president, Asia Pacific, SunGard, the trend towards centralisation and RTCs is clear. “Local firms continue to invest in these types of technology, acquiring treasury technology as they see it as a way to increase their competitive advantage,” he said. “Chinese firms are increasingly seeing the need to invest in treasury technology as they play a larger role on the global market and expand overseas. Expansion opens them up to new risks such as foreign exchange (FX) risk and counterparty risks that are inherent in global markets, as well as liquidity risk.”
Readier availability of treasury technology has also helped encourage RTCs. Fifteen years ago, the technology and cost involved in setting up an RTC meant that only the largest global multinational corporations (MNCs) from Europe or North America were willing and able to bear the cost. Fifteen years later and Asia’s enhanced economic profile among global MNCs means that the region is a revenue generator. The fact that the technology is easier to implement and is much more affordable has lifted barriers to entry especially for smaller local firms.
RTCs and offshore renminbi hedging opportunities
Operational complexity and business growth aside, there are other trends at work encouraging the development of RTCs. The internationalisation of the renminbi and the emergence of the renminbi trade settlement scheme, for example, have given additional impetus to offshore RTCs as they offer opportunities to hedge foreign exchange (FX) exposure.
“Before the internationalisation of the renminbi, corporations operating in China had to manage their renminbi exposure onshore, and usually this was done at the operating entity level. With the internationalisation of the renminbi, treasurers can opt to set up an offshore re-invoicing centre and centralise renminbi FX management to an offshore RTC,” said Stefan Leijdekkers, head of regional sales, North Asia, at Bank of America Merrill Lynch global treasury solutions. “We are seeing an increasing number of clients centralising renminbi FX management in Hong Kong, where currency regulations are more liberal than in the mainland. Some of these clients have included offshore renminbi accounts into multicurrency notional pools, essentially making renminbi part of a global liquidity management structure for the first time.”
Chinese and Indian firms in particular are also less impeded by the need to replace offshore legacy systems, unlike many regional firms, and can therefore enjoy faster decision-making processes. “Most Chinese corporations probably have just one system managing domestic services, and don’t really have the infrastructure to go abroad,” said Connie Leung, director of payments and trade markets Asia Pacific at the Society for Worldwide Financial Communications (Swift). “When they do go abroad they face a new set of challenges and that’s where regional treasury centres can play a much more relevant role. By contrast, non-Chinese regional firms may already have many different offices and some legacy systems to help them operate, though maybe not very efficiently.”
Growth in shared services centers (SSCs) is also a developing trend, as fast growing sales means it no longer makes economic sense to maintain individual finance staff in every individual market. But for Asia’s emerging companies looking to support international expansion and growth, the case for setting up an RTC is more compelling. “As many of these firms are top-line focused, an RTC will help them expand geographically while enabling them to effectively manage working capital and liquidity,” said Leijdekkers. “SSCs are better suited for more mature companies where the greater focus is on efficiency, control and cost.”
Asia-Pacific’s patchwork of regulatory regimes and currencies mounts a challenge to any firm wishing to optimise its operations. And for firms of a certain size, centralising treasury is becoming more viable and attractive option. Setting up re-invoicing centres in Singapore, for instance – often favoured as a location for RTCs over Hong Kong by non-Chinese firms due to its depth of talent, mature financial markets and greater number of taxation agreements — can help companies steer clear of the pitfalls that befell many global MNCs by preventing pockets of cash becoming trapped in individual jurisdictions.
Many local firms are also turning to RTCs earlier than their Western counterparts. Chinese and Indian firms, for example, are more likely to establish offshore treasury centres at an earlier stage than their US or European MNC counterparts did at similar stages of development, largely due to the intense regulatory regimes in these two emerging countries. Given that these are unlikely to change in the near future, the move to RTCs by large local firms should continue apace.
This article was first published in the August 2011 issue of FinanceAsia magazine.