By Joseph Neu
Trapped cash plagues multinational treasurers more than it ought to. But what if instead of fretting about how to get cash out of Argentina, treasurers could see positive change in the global liquidity landscape? This may be happening with China. Despite a liquidity seize up in June, or perhaps because of it, China continues to move to internationalize the RMB and, more importantly from an MNC liquidity standpoint, open up opportunities to access cash building up in China for use outside it.
Yet, one of the ironies is that once MNCs set up the pipes to move liquidity out, they grow more comfortable leaving the cash in. In a kind of reverse psychology, Chinese officials may have discovered that the secret to attracting healthy liquidity is to give it an exit, while at the same time offering ample reason for it to stay.
So, here’s the question that every MNC treasurer should ask, if RMB were freely convertible would I really want to bring all my cash out? Slowly, but surely, cash will no longer be “trapped” in China, but parked there for “safe” keeping.
Reasons to keep cash in China
Still not convinced you want to keep cash in China—here are some reasons why:
- Attractive risk-return. Leaving cash in even the most conservative, triple-A money fund will earn you 140bps or more over time deposits earning between 1.35 percent (7-day) and 3 percent (1-year). From a counterparty risk perspective, you’d rather be investing excess cash in China in a RMB fund than leave it in any one bank, especially a local Chinese one.
Indeed, the aforementioned liquidity issues that China weathered in June put the rated RMB money funds to the test. According to Fitch, in a report issued in response to the crisis on June 26: “… rated Chinese money market funds (MMFs) have so far weathered the tight liquidity conditions in China’s financial sector. This reflects the high liquidity and shorter maturity profiles of these MMFs relative to the broader MMF universe in China.”
The Fitch-rated, AAA funds include the China International Fund Management Money Market Fund (CIFM), offered in JV with JP Morgan Asset Management; the Gao Hua Sheng Yu Money Market Collective Investment Scheme, offered with Goldman Sachs Asset Management; the Harvest Prime Liquidity Money Market Fund, rated ‘AAAmmf(chn),’ offered with Deutsche Asset Management; and the HFT Liquid Money Market Fund, offered with BNP Paribas Investment Partners.
- A birth-of-a-currency investment opportunity. To help put the RMB in perspective, consider that China aims for no less than to position it as a G-4 currency, right up there with the USD, the EUR, JPY and GBP. And, speaking of the euro, what we are witnessing with international RMB is the second birth of a major global currency in our generation. With every CR fight and debt ceiling political game of chicken that US politicians play, the more China seems motivated to positing the RMB as a viable reserve currency. Treasurers had better believe that it will want to see financial assets created to warrant your excess cash investment and it will watch who is investing in the birth of the international RMB.
- China still has growth. If further investment in China is on your radar screen in the next several years, why go through the motions to pull the cash out just to put it back in? It’s just not tax-efficient (even if you offshore your RMB, you eventually will need to cough up for the withholding tax. Meanwhile, the median forecast for China’s GDP growth is 7.8 percent.
- By the time you need it elsewhere, it will be even more freely convertible. If your grand plan is to convert all your offshore cash to USD in anticipation of some grand US tax reform (for US MNCs), you can rest assured that by the time that happens, you will in all likelihood have no problem getting your money out of China.
Full convertibility is part of the five-year plan SAFE issued in 2011 (e.g., sometime before end of 2015). And, in the meantime, you will have less opportunity cost keeping it in RMB than parking it offshore in USD.
And speaking of RMB offshore, if you are worried about leaving cash in China, you still have increasing opportunities to invest cash in RMB-denominated asset classes in Singapore and London, now that they have clearing arrangements, if not Hong Kong.