MNCs in Asia are generating lots of cash; since some of the normal tools aren’t available, what to do?
Many MNCs in Asia, both local and foreign-based, are now past their “establishment phase” in the region and face problems that have challenged firms doing business in the West for years. One of those problems is that these companies have begun to generate significant cash piles in certain places. The question for these companies is what to do with that cash.
Unlike Europe, pooling is not widely available in Asia, and much of the cash is building up in countries with restrictions on cross-border movement – i.e., China. Moreover, Western MNCs are long USD, while many Asian firms are short USD as liquidity in the region’s chief trade currency is becoming more restricted.
This sets the stage for MNCs to consider providing liquidity to suppliers and customers. In so doing, however, they must also have a keen eye on development of the off-shore RMB market and its emerging role as a currency of billing in conjunction with cross-border trade (see related story here).
Members of the NeuGroup’s Asia Treasurers’ Peer Group (ATPG) discussed these challenges at its October pilot meeting in Singapore. Here are a few of the takeaways from that discussion:
- Be mindful of tax-arbitraged intercompany funding opportunities. While the ATPG pre-meeting survey revealed that only a minority of participants were pursuing tax-driven affiliate financing, the success of two members in this area, one a tech company and the other an energy company, suggests that more MNCs should explore their options.
- Look closely at working capital improvement opportunities. Several participants noted their companies’ emphasis on improving cash flow through working-capital initiatives. The pre-meeting survey revealed that many more participants are involved on the customer financing side than the supplier side, but new opportunities are emerging that should change this trend. The challenge on the supply side is getting people on board internally, which often means treasury needs to get procurement to see things its way.
- Find where to get the credit and commercial counterparty risk information needed. Another major challenge is getting comfortable with credit and counterparty risk. At one member company, credit and collections has been recently brought back under treasury’s purview and this provides an opportunity to make headway in integrating treasury-backed risk analysis. Still, as the recent rule-change curbing third-party entrust loans in China helped underscore, treasury would still prefer to rely on banks and other third parties to help support their risk analysis.
- Assess the impact of bank balance sheet and liquidity constraints. An increasing inhibiting factor on working capital financing is that banks are finding themselves needing to pull back from offering their balance sheets. While it is important for them to have skin in the game (this helps with the quality of their credit risk evaluations), corporates should be prepared to do the same. This could be a use for excess cash in the region, for example. There are several creative ways to push forward with supply-chain and other working-capital financing initiatives despite banks’ need to be stingier with their balance sheets. Trade insurance is one starting point.