EUROMONEY, Money, China - Thu October 10, 2013

Cash management: A revolution in cash for China

Demand for sophisticated cash management services in China is rising as the authorities press for greater business efficiency at home and Chinese corporates expand their foreign operations. Renminbi liberalization is another driver.

2998For many global lenders, China once embodied both ends of the financial spectrum, but little in between. Banks until very recently harboured fantasies of becoming local retail banking powers; others coveted plum mandates on mainland stock sales. A very few desired both.

Fewer focused on the middle ground, often for good reason. Transaction banking, the heart and lungs of global banking, offered much in the longer term, yet it remained wrapped in red tape. The frustration was felt both by Chinese firms keen to go global and by multinationals desperate to inject efficiency into sprawling mainland operations.

Yet within just a couple of years, all that changed. Cash management is suddenly in vogue in China, and everyone wants a piece of the action. At Shanghai-based Bank of Communications (BoCom), the country’s fifth-largest lender, revenue from the cash management division is rising by 75% a year, according to Yao Wei, BoCom’s head of cash management.

At Bank of China (BoC), among the country’s best-run big state lenders, 15% of all corporate clients now participate in the bank’s in-house global cash management system (GCMS). Tong Liu, chief product manager at BoC’s cash management division, reckons the number of mainland corporates adopting its GCMS suite of services is growing by between 120% and 150% a year. BoC retained first place in the mainland in Euromoney’s 2013 cash management survey, followed by HSBC and China Construction Bank. “Cash management plays a very important role for Bank of China,” says Tong.

For leading foreign lenders working in China, the product is even more vital to daily operations. Pei Yigen, head of treasury and trade solutions at Citi China, describes it as the bank’s “single-largest business function” on the mainland.

Meanwhile, 30% of all pan-Asia cash management revenues generated by Deutsche Bank in 2012 was sourced within China, says the German bank’s Greater China head of global transaction banking, Carl Wegner. Deutsche placed fifth in the 2013 Euromoney survey in China, up from eighth the previous year. Kee Joo Wong, head of global payments and cash management at HSBC China, which ranked second in the survey, says the product is “a key component” within the bank’s operations, providing its corporate clients with “sustainable and robust” ways to manage working capital flows.

Cash management non-financial institutions survey 2013
Best Chinese domestic cash manager

2013     2012     Bank
1     1     Bank of China
2     2     HSBC
3     5     China Construction Bank
4     4     ICBC
5     8     Deutsche Bank
6     7     China Merchants Bank
7         Barclays
8     9     China CITIC Bank
9     10     Agricultural Bank of China
10     11     Bank of Communications

There are good reasons for this transformation. China’s new generation of reform-minded leaders want to strengthen and diversify a lopsided economy. The message has come down from on high: mainland banks and state-owned enterprises (SOEs) need to be run with greater financial efficiency.

This creates a divergence in the type of services needed by mainland firms, depending on where they operate. Domestic SOEs tend to prize liquidity management services highly, notes BoC’s Tong, while mainland firms operating overseas covet solid cashflow-forecasting services. No one likes running out of money far from home. For BoCom’s Yao, the service in most demand is cash pooling, while corporate clients are also increasingly “seeking offerings like Swiftnet technology, notional cash pooling and virtual account management”.

The industry’s fortunes are also enmeshed in Beijing’s desire to create and control a clutch of world-class SOEs. As more Chinese firms venture overseas, they soon grasp the importance of cash management to everyday operations, however mundane. “Mainland corporates are seeking sophisticated advice on cross-border cash management,” says BoCom’s Yao, making it “increasingly vital that [the bank] promotes itself in this area”.

The Shanghai lender is rapidly expanding abroad, having opened offices in cities including London, Singapore and New York. It is also, Yao adds, refining its cash management offering thanks to a long-standing relationship with HSBC. The UK lender owns just under a fifth of BoCom, and Yao describes a two-way collaboration on cash management as “promising”.

The same is true for foreign banks, which find themselves advising and guiding an increasing number of expansion-minded SOEs. Many Chinese firms are still wary, even fearful, of dangers that appear to lurk everywhere outside the mainland, and this demands a fair amount of hand-holding. “For the Chinese corporates we work with – which is a large and growing sector for us – an important part of everyday work in cash management involves explaining to our clients what can be achieved outside China,” says Deutsche Bank’s Wegner.

As Chinese firms go global, Wegner adds, they are starting to set up international service centres in places such as Hong Kong or Germany. “We are helping them to understand what can be done offshore, working with enterprise resource planning and SAP solutions.” HSBC’s Kee notes that mainland corporates with growing offshore operations want to minimize risk while “maximizing their return on working capital sitting offshore”.

And as Chinese firms explore new territories, their needs rise. The drive to compete overseas pushes SOEs to seek out complex cash management services. Citi’s Pei points to the rapid evolution taking place within mainland SOEs. “We constantly [need to] innovate to help them increase operating efficiency, improve financial transparency and visibility, and mitigate operational risk,” helping satisfy their “need to ‘go global’,” he says.

Within China, the industry is also evolving apace. Until recently, cash management was maddeningly slow and inefficient. Every time a new mainland office or factory was opened, corporates were forced to open up new local bank accounts and fill in endless, triplicated forms. Payments processed locally could take days and even weeks to filter upward into the company’s centralized framework.

Old ways are now being swept aside, with mountains of paperwork being reduced to molehills. Take the number of supporting documents needed by corporates to process renminbi-denominated cross-border payments – slashed from four to just one, thanks to the simplified renminbi cross-border payment pilot scheme, announced in June 2012 by the People’s Bank of China’s Shanghai office.

Those rule changes now allow companies to process payments from multiple offices or regions on a single day, or to stagger payments more easily, creating a cleaner and more simplified cash management framework. All of this points to a future that promises, notes HSBC’s Kee, a “more deregulated and flexible environment for treasurers”.

Chinese corporates are adapting quickly to the changes. Where once ambition was limited to ensuring that money transferred from one point to another arrived in one piece, corporates now demand increasingly sophisticated services from their chosen banking providers.

“Our clients’ treasury goals are changing from basic transaction settlement to liquidity management, from decentralized operations to centralized treasury management, and from single market to regional and even global concentration,” says Citi’s Pei. An increasing number of clients have also started to adopt mobile and internet banking services. “The digital revolution is gradually changing the way we do business in China,” he adds.

Another phenomenon at work is the rising quality of cash management services on offer. Foreign banks still largely outperform Chinese rivals, having refined their wares over decades, even centuries. Such banks as Deutsche, HSBC and Standard Chartered are well known to mainland SOEs, providing them with financial advice both in China and across the world.

But Chinese lenders are battling back. Multinationals operating in the mainland make up about 5% of all cash management revenues generated by Bank of China. “Foreign corporates are an increasingly important facet of our cash management operations,” says BoC’s Tong.

It’s notable that seven of the lenders filling out Euromoney’s 2013 China top 10 are headquartered on the mainland, five of which improved their standing from last year’s survey. Bank of China rose to fifth in the pan-Asia cash management rankings, from seventh, with China Citic Bank up four notches, to 14th place.

And the process of change has only just started. Cash management is about to undergo its own financial revolution in the years ahead, as China opens up, becoming truly integrated in the global economy. BoCom’s Yao points to a brace of changes set to alter China’s financial sector forever: the opening-up of the capital account and interest rate liberalization, both of which could take up to a decade to complete.

Nor is China’s determination to open its capital account just about shifting money offshore. “The bigger picture here,” says Deutsche’s Wegner, “is about helping corporates to make more efficient use of their working capital, which regulations such as inter-company renminbi lending help further to facilitate. It’s about bringing in all these new aspects of the cash management industry to companies doing cross-border business, as regulations continue to evolve.”

Indeed, Beijing’s determination to internationalize the renminbi (link to cover story?) – or at least to begin the process of doing so – by 2015, is probably the biggest challenge and the greatest opportunity facing the industry. Much has been made of the potential of the Shanghai free-trade zone (FTZ) as a potential rival to Hong Kong, particularly given the latter’s role as China’s de facto offshore financial centre.

The bigger impact will likely be felt by corporates operating in the People’s Republic. The new zone will aim to liberalize foreign and renminbi-denominated payments and to slash bureaucracy and paperwork: essentially, to turn the FTZ into a replica of Hong Kong or Singapore.

“The results could change the way people see China financially,” says a foreign cash management banker. “You could end up seeing the regional treasury centres of global corporates deciding to base themselves in Shanghai, rather than Hong Kong. There will be a lot of leeway in how companies can operate there, financially. It’s a huge opportunity for China to really change the way it’s viewed by the outside world.”

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