The evolution of liquidity management tools in Asia was popular topic on various agendas for NeuGroup meetings this summer and fall. That’s because regulatory changes in key markets in the area are enabling new regional solutions. And at one recent meeting of the NeuGroup’s Global Cash and Banking Group (GCBG), members discussed the changes and how knowing more about them will help in implementing the best solutions possible.
One of the basic questions companies doing business in the area is pool location. Where to put your pool? Based on pre-meeting statistics, nearly 24 percent of respondents said they made an inquiry to China’s SAFE (State Administration of Foreign Exchange) and the PBOC (People’s Bank of China) or a partner bank about the renminbi pooling program now available in China.
As companies grow in Asia, it’s sensible to keep some money there. It was recommended that treasurers consider pulling excess cash into a global pool in London, New York or the Netherlands, but still parking non-excess cash in lightly regulated Hong Kong and Singapore. This way instead of over-funding local operations, you can just-in-time fund without having to bring money East against the sun. A word of caution: Singapore does have over 60 double tax treaties, so if you are planning to pool there it is advisable to get some tax advice and do some modeling.
Multi-currency, cross-entity pools are difficult to achieve because of tax issues, so a popular strategy is to have one entity own all of the accounts. Money can be swept up from the subs to a single notional pool.
GCBG members also discussed not waiting too long to act on pooling solutions in the area. That’s because of the rapidly changing landscape there. The speed at which the PBOC is unlocking the Chinese market is unprecedented. Not long ago, China would have been categorized as highly-regulated and very difficult (or impossible) to do business (from a US multinational’s perspective). It was next to impossible to get funds transferred out of China and including Chinese accounts in any type of global pooling structure was out of the question. Now, it’s a new game (see related story here). With the regulation changes in RMB, many of the same type of everyday treasury transactions can now be accomplished in RMB with simplified documentation and improved timelines.
What’s the best structure? Dollar concentration is the most common. Dollar concentration structures have been around for a long time and are seen as a popular tool for US MNCs to pool funds and manage cash under one currency (typically the USD). These structures are common in Asia as well, but are driven by and potentially restricted from, the overall tax structure and/or business objectives. Physical concentration, notional pooling, and more recently, interest optimization structures are growing in popularity in Asia. Most members have a physical concentration and/or a notional pool set up to manage Asian cash.
The internationalization of the RMB is an exciting opportunity for many global multi-national organizations to review their Asian cash management structures and bring greater efficiency to the region. Onshore China cash is not quite as “stuck” as it used to be and many are taking this opportunity to re-evaluate their cash needs for the entire region and are putting regional structures in place that now include RMB.