By Joseph Neu
How can treasurers ease fund flows out of China? And will treasury be replaced by an algorithm?
Where exactly US-China relations are headed is impossible to say—one big reason many investors are very uneasy. But for multinationals, it’s safe to say that the best way to get money out of China is to diversify your fund-flow channels; it’s a takeaway that comes up again and again. Also, will treasurers in human form become scarce in Asia?
UNTRAPPING THE TRAPPED
Multiple structures for multiple channels. With fresh guidance on cross-border flows out of China as the backdrop, a global bank’s China transaction banking head told participants at a recent Asia Treasury Peer Group meeting that having multiple structures will allow corporates to take maximum advantage of both official regulatory changes and unofficial window guidance. These structures include in-country and cross-border pooling, cross-border sweeping arrangements, centralized cross-border payments (aka payment factories using POBO/ROBO and virtual accounts) and outbound/inbound intercompany loan programs.
Prepare to tweak and change. Given that official regulatory changes and changes to unofficial guidance happen fairly often, you need to be prepared to tweak your use of channels and/or clean up cash management structures so that your cash outflows are as fluid as possible. One cleanup example cited involved ensuring that all entities—not just some—are in the cash pool to share the quota to the maximum level. That said, if you have structures set up under a previous regulatory methodology that are optimal for you because of a bigger quota capacity, then you might want to keep separate arrangements for specific legal entities. As one member said, “I am kind of glad we have not committed to any structure yet, so I don’t need to keep changing it.”
Understand the concepts. If you’re not fluent in all the latest guidance, it can quickly sound complicated. Before they get too confused, most treasury professionals should start with the basics. Simply stated, there are several fund-flow channels, then there is a separate track in each channel for foreign currency flows, mainly USD, in and out of China (governed by the State Administration of Foreign Exchange, or SAFE) and RMB flows in and out of the country (governed by the People’s Bank of China, or PBOC).
Competition in the channels. The latest SAFE regulation in mid-March gives MNCs an enlarged quota of up to two times total equity for centralized foreign debt (incoming flow to China) and a quota of 30% of total equity for centralized offshore loans (outgoing flow from China), resulting in more interest payments out of China going forward. SAFE has also simplified the quota registration process to a one-time effort, streamlined supporting documents for foreign-debt FX transactions (digitized), and allowed for the removal of a previously required header account for the leading China entity in the structure.
The hope is that the new SAFE regs will prompt the PBOC to follow suit with its own easing of channel restrictions. The knock-on effects, of course, are made more complex by the local regulators and other government authorities (including tax authorities), who may have their own channel tracks and guidance on fund flows. For example, a simplification of a header account structure may work for one channel, but not necessarily the rest until everyone is on the same page.
Still a balancing act. At the end of the day, fund flows out of China must balance the key performance indicators (KPIs) that all channel arbiters (banks, regulators, government authorities) require. This means the incentives they use to bring in foreign investment must match up with a demonstrated ability to take profits earned out—at some point—while maintaining control of the RMB and USD balance of payments at each level.
THE TREASURER’S CODE—IT’S NOT A PROTOCOL!
Regional treasurers in Asia have been contemplating the elimination of people from treasury operations lately. Is the treasurer’s role at risk?
“There is no problem in treasury that cannot be solved with better coding.” That provocative statement raised a few eyebrows at the recent meeting of the Asia Treasury Peer Group in Singapore. The member who said it, paraphrasing a leading proponent of digital transformation of treasury, clarified that it applies more to treasury operations than treasury’s role in business support. But still.
Advantages to automating treasury ops. There are essentially three main advantages to coding treasury processes for greater automation:
- Cost reduction and greater productivity. Bots licensed for $8,000-$10,000 per year that work 24/7/365 might reduce the cost and boost the productivity of certain treasury operations dramatically. With all the focus on scaling treasury to support growing business mandates, supplanting people with robotic process automation (RPA) can seem unavoidable.
- Employee engagement through technology. The ongoing advancement in RPA and other forms of automation suggests that a lot of issues in treasury operations involving transaction processing, capturing and managing data, and creating forecasts and reports can be solved by coders. Coding automation into workflows also frees up people to interact with the people who run the business processes and better support them with finance. Most importantly, however, the automation of mundane tasks that shifts work to more valuable human interaction keeps employees engaged and motivated.
- Greater cybersecurity and fraud mitigation. People represent the most significant cyberrisk. A cybersecurity expert from a global bank with a center of excellence in Singapore noted that the largest proportion of cyber events still exploit human vulnerabilities by convincing people to do things they shouldn’t (see below). The best way to secure treasury, therefore, is to eliminate people from processes, especially those involving payments. “It’s far more secure to embed proper controls in an automated, straight-through process than to subject payment workflows to human failures,” he noted.
Eliminate the easy theft. Most cyber events consist of business emails that convince people to change payment instructions, give up information or click on something that installs malware. It’s far easier for hackers to send an authentic looking and sounding email that fits facts and circumstances and convinces someone to circumvent normal processes and procedures than it is to hack into a secure system. This is why cybersecurity experts emphasize automation. Code is less vulnerable to an email with new payment instructions or the need for an emergency wire, especially if the identity verification controls are coded into the process.
Leave sophisticated hacker risks to others. Preventing hacking of secure systems is probably beyond treasury’s ability to manage. The level of sophistication of crime syndicates and state actors with abilities to compromise secure enterprise systems without convincing humans to circumvent security brings the risk mitigation squarely into the realm of the information security teams of the enterprise and its partners. This is another reason why cybersecurity experts emphasize the people problem.
Check the need for a people control point? Eliminating people as a control point on straight-through processes is likely to be difficult for some treasurers to give up on. Indeed, having a human being eyeballing automated payment files before releasing them to the bank feels safer to me. But I’m far more concerned with giving up on the need for human judgment in risk management activities.
Be smart. It still seems prudent to have checks and balances on automatic execution of outputs from a risk control model, for instance. Moreover, I believe people should still have an override switch on machines, which may still be compromised, poorly coded or otherwise far from infallible. People are a risk—but so are machines.