While the trend globally has been for treasurers to rationalise their banking relationships, the geographical scale and market conditions in China mean that it is often necessary to maintain relationships with a number of local and foreign banks in order to ensure adequate coverage. Citi’s Multi-Banking Treasury Solution aims to work within this framework by enabling treasurers to manage different banking relationships via a single platform, making it possible to take a more centralised approach to liquidity management.
Background
The China banking landscape
The development of treasury operations in China in recent years has taken place against the background of a vast and fractured banking landscape. There are currently over 130 commercial banks, operating 280,000 bank branches and offices across China. The level of service quality and product availability differs significantly, even between branches of the same bank.
Globally, a major trend in cash management has been for corporates to reduce the number of their bank accounts and banking relationships in order to facilitate a more centralised approach to liquidity management. However, the nature of the banking industry in China means that there is a limit to the extent to which this can be achieved.
Foreign banks and domestic banks
The foreign banks which have moved into China have a lot to offer corporates in terms of products and services, with electronic banking solutions and global networks. However, the major domestic banks have vast domestic branch networks with which the foreign banks cannot compete.
The market was opened to foreign banks at the end of 2006 as part of China’s WTO entry conditions, but the number of branches held by foreign banks in China remains small. In total, the foreign banks currently operate around 200 branches across China. The largest Chinese bank, in comparison, has over 18,000 branches. For companies that need access to local banking services, relationships with domestic banks are therefore still essential.
Co-operation is key
Many of the foreign banks operating in China have worked hard to develop good relationships with the domestic banks. Much can be gained by working together. The foreign banks can benefit from the domestic banks’ impressive branch networks, while the domestic banks can benefit from the foreign banks’ technical expertise, product range and global perspective.
Companies moving into China
Recent regulatory changes have encouraged multinational companies to set up regional headquarters, shared service centres and holding companies in China. In order to obtain the benefits of this form of centralised approach, it is crucial to have good visibility over cash – a task that is difficult to achieve if there are a large number of different banking relationships, requiring different bank software to be used.
The Solution
One product which has been developed to help customers in a multi-banking environment is Citi’s Multi-Banking Treasury Solution. This product, developed specifically for the China market, allows customers to access bank accounts held with domestic banks as well as with Citi via Citi’s secure electronic banking platform, CitiDirect® Online Banking. By using the platform, corporates can gain better visibility over their cash and adopt a more centralised approach to managing their liquidity without sacrificing key local banking relationships. Consequently, cash flow forecasting can be carried out more accurately and efficiencies can be gained by the rationalisation of electronic banking platforms.
Meanwhile, the participating banks benefit from a larger share of their clients’ business, as the corporates using the solution tend to reduce the number of their banking relationships. In addition, all of the banks involved in the programme benefit from the enhanced product capability and competitive edge which results from their ability to offer integrated solutions and services.
Development
Citi began working on the solution in early 2005, when it developed a host-to-host connection with the first participating domestic bank. Since then, a further four Chinese banks have partnered with Citi to participate in the solution. Citi has continued to develop alliances with domestic banks in order to expand the number of participants. Meanwhile, the functionalities of the solution continue to be developed.
Host-to-host connection
The defining feature of Citi’s Multi-Banking Treasury Solution is the host-to-host connection held between Citi and the participating domestic banks. Payments can be initiated via this connection, which also supports transaction and statement reporting. CitiDirect in turn connects with the company’s ERP system to enable straight through processing.
Diagram 1: Host-to-host connection
By using the host-to-host connection, companies can obtain intraday account information from their domestic banks via CitiDirect®, as shown on the screenshot below.
Diagram 2: CitiDirect® Online Banking
As a result of the improved level of visibility and control over the company’s cash provided by the Multi-Banking Treasury Solution, liquidity can be managed on a centralised basis, leading to cost and operational efficiencies.
The solution facilitates cash concentration as the debit and credit balances of different group entities can be offset in order to reduce interest costs or enable the use of high-yield investment tools. Better internal control can also be achieved across the participating accounts as a result of CitiDirect’s pre-defined multi-layer authorisation functionality.
Case study
Anheuser-Busch
Janet Ming
Asia Treasury Director
Stanley Wang
Senior Financial Analyst, International Treasury & Risk Management
Anheuser-Busch is a leading global brewing company, most notably producing Budweiser and Bud Light. The company established its presence in China in 1995 with the acquisition of a first brewery and acquired Harbin Brewery Group in 2004, which added a further 13 breweries. Anheuser-Busch has 18 companies in China including a regional head office, and owns a 27% stake of Tsingtao Brewery Company. Two treasury staff are based in Shanghai, working closely with the international treasury based in St. Louis, Missouri.
The vast geographical scale of China means that it is often necessary for corporates to bank with a large number of banking partners. Anheuser-Busch uses more than 20 banks in China but is keen to pare this down to its key banks: one foreign and one domestic bank. While the market has recently been opened to foreign banks, the huge branch networks of the local banks make it necessary to use domestic banks in order to ensure adequate coverage, particularly for companies like Anheuser-Busch which rely on local banks to collect sales revenue in cash.
“Now, as we are expanding our business in China, we have created a dedicated Asia treasury department which is focused on working with the banks and finding treasury solutions to lower our cost of capital and provide better funding.”
The company has only recently moved towards a centralised approach to treasury, as treasury operations were previously conducted on a local basis. “Three years ago, before we bought the Harbin Brewery Group, we had no Asia treasury department,” explains Stanley Wang, Senior Financial Analyst. “All the treasury work was managed by the accounting staff locally, with some assistance from the US international treasury department. Now, as we are expanding our business in China, we have created a dedicated Asia treasury department which is focused on working with the banks and finding treasury solutions to lower our cost of capital and provide better funding.”
Before the acquisition in 2004, the Harbin Brewery Group’s treasury operations were very basic, with no access to e-banking solutions. Balance information was limited to the monthly statement issued by the bank, or had to be obtained by visiting the branch. The expansion has made visibility over Harbin breweries’ cash increasingly important, particularly as the company is now looking to expand Harbin brand across China. It became clear that a more centralised approach was required, and that a sophisticated banking solution should be adopted in order to provide better visibility over its cash.
Anheuser-Busch was also keen to consolidate its numerous banking relationships, with the goal of eventually using one local and one foreign bank. The relationship between the two chosen banks was of key importance. “We needed good co-operation between our local bank and our foreign bank, so that we could better use the expertise from both banks to achieve good cash control,” says Janet Ming, Asia Treasury Director.
Anheuser-Busch had been working with Citi for four years, having been a pilot customer for Citi’s liquidity management system. The services provided by Citi included an RMB cash pool incorporating one brewery and four branches, as well as payables and receivables services. “We found CitiDirect®, Citi’s e-banking system, to be reliable, cost-effective and efficient,” says Ming. The decision was therefore taken to implement Citi’s Multi-Banking Treasury Solution in order to streamline the company’s banking relationships by taking advantage of the strong relationship Citi has with ICBC, Anheuser-Busch’s key domestic bank.
The major benefit of this solution was the reduction of the number of banking relationships that Anheuser-Busch needed to maintain. “We don’t have to use so many local banks to provide the local cash pick up or local banking services,” explains Ming. Citi’s Multi-Banking Treasury Solution incorporates a host-to-host connection with ICBC, which enables Anheuser-Busch to access balance information relating to the accounts held with the domestic bank via Citi’s e-banking system. The solution has also made it possible to automate the cash concentration structure which was set up to move the cash generated from the Budweiser business to the Harbin business.
Anheuser-Busch is planning to continue centralising its treasury operations in China as the two businesses are integrated and intends to set up a China shared service centre which will initially focus on accounts payable. The consolidation of banking activities will continue to be a priority as the company moves forwards. “The big obstacle in China is that you can’t find one bank that can fulfil all your needs, in terms of branch network, banking services and e-banking capabilities,” says Ming. “However, Citi’s Multi-Banking Treasury Solution has enabled us to minimise our banking relationships and improve our cash visibility and control.”
Technology
The host-to-host connection between Citi and its partner banks uses leased lines that provide a high level of transmission encryption in order to ensure maximum data security.
The host-to-host link is used instead of SWIFT as SWIFT does not support Chinese character transmission, which is essential for the processing of renminbi payments. In addition, few banks in China are able to provide intraday statement reporting using SWIFT. The Multi-Banking Treasury Solution supports Chinese characters and intraday reporting.
While China’s banking landscape is experiencing significant changes in the wake of the opening of the market at the end of 2006, the vast number of banks in China mean that it will be a long time before most corporates can adopt a single-bank approach.
Points of differentiation
Citi has drawn on the features of other banking platforms elsewhere in the world in developing the Multi-Banking Treasury Solution, and consequently this solution offers a number of points of differentiation compared to the other solutions on the market in China.
These include:
Intraday account information
Straight through processing
Real-time payment initiation
Chinese language support
These features are available on all the participating accounts.
Conclusion
While China’s banking landscape is experiencing significant changes in the wake of the opening of the market at the end of 2006, the vast number of banks in China mean that it will be a long time before most corporates can adopt a single-bank approach. As a result, solutions such as Citi’s Multi-Banking Treasury Solution are likely to be very attractive to treasurers, offering a practical means of managing liquidity on a country-wide basis without sacrificing key banking relationships.
Citi’s Global Transaction Services
Citi’s Global Transaction Services – a pioneer in China’s cash management industry – provides innovative and efficient solutions to its thousands of China-based and foreign clients with operations in China.
At the cutting edge of transaction banking technology, Citi’s multi-banking capability generates and enhances cash management efficiency throughout China, allowing your business to access and initiate local bank account information and transactions through CitiDirect® Online Banking, our award-winning web-based delivery platform.
With unrivalled breadth and depth of experience, on-the-ground presence and our position as a service leader throughout Asia Pacific, Citi meets every challenge in the way that only an industry leader can.
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