As Chinese economic growth continues apace, corporates need to make sure they have the right support from their banks. But it can be difficult to maintain the right balance of local and global banks – particularly if their geographical footprints do not meet treasurers’ needs.
Through the financial crisis and recession, European and American treasurers have been learning the importance of strong bank relationships. As credit became more expensive or even non-existent, regular and productive contact with banks became essential to securing lines of credit, as well as aiding the procurement of higher service quality and lower prices.
The impact of the crisis in China, in contrast, was far less. China also experienced a stronger rebound from the downturn – particularly in terms of banks’ willingness to lend. That is not to say bank relationships in China are always easy, however. This article explores the challenges faced by both domestic and international treasurers as well as the benefits a well-managed relationship can bring.
Maintaining close links with your bank is helpful in two key ways.Firstly, in difficult times banks may become a lot more cautious about their lending, and a strong relationship can help maintain your firm’s lines of credit.
Randy Ou, Treasurer, China and Global Centre of Excellence, HP, explains his treasury’s approach: “We refer to bank relationships as partnerships. It is a two-way exchange, and treating banks fairly when you can means they may be fairer too when you need help. We may not drive down banks to save every last dollar in negotiation sometimes, but in return we expect banks will give this back in different ways – for example, reserving lines of credit for us even when credit is tight in the market.”
Secondly, banks can offer services and assistance beyond standard banking requirements – and maintaining a good relationship with regular contact can help treasurers gain the most from their banks. Bharat Padmanabhan, Global Head, Structured Trade Finance, Standard Chartered Bank, gives an example: “Even as a basic service, we give clients access to a wide range of research and data relevant to their markets. For example, we provide research into currencies, economic conditions, different commodities and countries as required, on top of our normal banking services.”
Many smaller companies simply work with the nearest bank which offers the required services, and larger corporates tend to have long-established relationships with their banks. However, there may come a time when treasurers want to forge new partnerships or review the banks they work with.
Choosing your banks
Jason Wang, CFO, Greater China, Henkel, explains the process his company underwent in choosing a new partner bank.
“Around two years ago Henkel conducted a very thorough contest. We invited five core banks we already had relationships with to compete for the cash management mandate for all Henkel’s Chinese operations. We set up a long list of criteria which they had to fulfil. This included hard factors – bank network coverage, service charges, timelines for processes – and soft factors – service level, system capabilities for the interface and reconciliation with our systems, for example.
“We held three rounds of interviews to narrow down the list of contenders. We studied their systems, visited operations centres, met their operations staff and spoke to reference clients to get a real ‘hands on’ feel for how we would work together. It was very important to us to be as thorough as possible.”
Lisa Robins, Head of Treasury and Security Services in China, J.P. Morgan, gives advice on the questions growing corporates should ask potential partner banks.
“When going global, Chinese corporates should make sure the new partner bank is a strong counterparty – it is important to ensure the bank’s risk management and business resiliency is strong with a good track record. The type of platform is important. If you want to expand into several countries, will you be able to operate through one system across all countries? It is a critical factor, and an issue for long-term growth – corporates tend to want to use flexible platforms which they can still use as they continue to grow, which are easy to access globally.
“Corporates should check the bank’s track record in customer service. If the partnership is going to work as the company grows and develops, a certain flexibility and dialogue is required, and that capability should be known from the start.”
Kee Joo Wong, Head of Payments and Cash Management, HSBC Bank (China) adds: “As well as considering a bank’s infrastructure in China, treasurers should consider the bank’s commitment to China, branch network, capital base, investment in human resources and advisory services. In addition, the bank needs to have the sophistication, infrastructure and operational service model necessary to support their business growth as they expand in China.”
After a partner bank has been chosen, the relationship needs to be maintained to stay strong and ensure the bank meets the treasurer’s needs and expectations. Staying in regular contact is the most important point. “Regular quarterly reviews allow us to ask clients where we are doing well and where we can improve,” says J.P. Morgan’s Lisa Robins. “But on top of that, corporates can help themselves further – just pick up the phone and speak to your banker, even if it’s just to discuss key market trends, for example.”
Randy Ou, from HP, agrees: “As a multinational company, we have long-term relationships with a wide range of local and global banks. On an international basis, we have regular meetings with our banks discussing their performance and our needs in all regions. We have further flexibility in regions to discuss specific aspects of the relationship – for example, our engagement in specific markets like China.”
The more the bank knows about how the company’s situation and how its treasury operates, the more likely it is to be able to provide suitable services, and the more it may see the company as a reliable partner. As a long-term partnership, working closely with banks can bring further benefits. “We provide training sessions for our customers,” Robins continues. “Right now, Chinese corporates are interested in seminars on regional treasury centres. They want to know how to optimise liquidity management across markets, too, and risk management is also a popular topic. Non-Chinese firms working in the country tend to focus on changes in the renminbi and surrounding regulations.”
As relationships develop, not only will the bank increasingly understand the company’s needs, but the treasurer will also gain a fuller understanding of what each bank offers. Randy Ou believes this is particularly important: “Working with a global bank over time and in different regions, we build up a picture of the quality of service. Standards can differ between different departments of a single global bank, for example, so it is important that we use information gathered from our different departments or countries to aid decisions in bank selection.”
“Multinationals operating in China would like to consolidate their relationships to use just one major global bank and leave out local banks”, says Jason Wang, Henkel’s Greater China Chief Finance Officer, “but what we have learned is that it is important to keep a balance.”
A key problem for companies moving into China is that of bank coverage. Global banks lack large branch networks throughout the country, making it difficult to provide sufficient support for corporates. Deborah Mur, Managing Director, Client Sales Management China, at Citi, says the challenge for foreign banks operating in China is scale: “We have branches in ten Chinese cities, and have plans to increase that number significantly over the next three years. You can compare that with the Chinese banks that all have a profound history, local ties, and thousands of outlets in China. Citi is expanding our footprint in China, including to the West as we open in cities such as Chengdu and Chongqing. Additionally, Citi is working closely with Chinese banks to jointly provide solutions to serve large multinational companies where needed.
“Everyone wins in these multi-banking structures. Customers get the services where they need them, leveraging Citi’s banking platform or SWIFTNet connectivity in order to establish full connectivity and integration with local or regional ERPs. The local banks deepen their relationship with the local entities.”
Bharat Padmanabhan, from developing markets specialist Standard Chartered, explains the bank’s aims: “As and when the opportunity arises, we provide a lot of support to companies scoping out, particularly into unfamiliar areas. We ‘handhold’ where possible, helping corporates understand the market and regulatory frameworks in new countries. We have a lot of experience in this, and it is very common for us to help existing Chinese customers in this way.”
A further potential hurdle for corporates looking for a global bank is the requirement that Chinese corporates have one ‘basic account’ from which tax and salary payments are made. Corporates need to be physically close to that bank, and the smaller footprint hampers global banks’ ability to provide this ‘basic account’. Other functions, like cash pooling, foreign exchange hedging and bank borrowing may still be achieved with the global bank, but it is necessary to have relationships with local banks as well.
Problems also occur in the opposite direction – for domestic Chinese firms expanding overseas. As these companies grow, they may need to partner with banks which have a network in the countries they are importing from and exporting to. However, many local Chinese banks do not have developed networks or partnerships overseas, making such operations difficult. For large companies, this is not so problematic – they can attract the attention of global banks and although those major international banks do not have a presence in absolutely every country, their degree of coverage is the best that is available. For small and medium sized enterprises (SMEs), however, the situation is more difficult.
“Western banks are basically focused on state-owned Chinese corporations, and haven’t even scratched below the surface elsewhere,” explains a senior treasury source in a top 100 Chinese corporate. “There is strong demand for their services – probably a hundred thousand Chinese companies are trying to export globally – but smaller firms cannot get any traction with foreign banks. International banks are just not attuned to the needs of any but the largest Chinese names.”
That is a position Deborah Mur sees differently. “At Citi, we have a full range of capabilities in China, supporting corporates from large multinationals to small and medium sized firms. We apply the same policies in China as we do in the rest of the world with regard to risk and diversification,” she says, adding, “In the past, we have seen more foreign direct investment flowing into China than coming the other way, but now we see an increasing number of Chinese firms do business and invest overseas and Citi believes we are well placed to support this trend given our extensive global network.”
And what is the best way of starting this relationship? To ensure the chosen bank can provide the most appropriate services, treasurers should be as clear as possible about their needs, says Mur. “Make sure to discuss thorough business plans, strategies and so on – it’s extremely important to provide sufficient information at the start of this kind of relationship.”
“The culture behind the relationship with your bank manager in China is very much a personal one,” says our anonymous senior treasury source. “In return for a bank manager helping you out, you need to put deposits with the bank. Chinese banks are very balance-sheet oriented, instead of using measurements like revenue and profitability, and that is done at a local level. Westerners make the mistake of going to a bank’s head office and assuming the relationship is established. In fact, the local branch manager often does not care about head office relationships – and unless you help him out, you will get very little done in return.”
Another treasurer who wishes to remain anonymous – this time from a global corporate with operations in China – agrees, saying some Chinese banks take this to extremes. “The branch-based nature of incentive schemes for bank managers mean that individual branches of the same bank can end up competing with each other, so you may have a relationship with one branch in Shanghai, but another branch in the same city will not help until you have also made a deposit at their branch.
“Similarly, the head office may try to emulate global banks by giving corporates a central contact. However, that relationship manager may not have sufficient authority over local bank managers, and so further relationships with local branches are required. This can be very time consuming for treasurers. However, local banks can still be very useful. They will generally have been established long before the global banks, and so have networks of contacts in place and a more sound knowledge of the local markets and regulations, which can work to the corporate’s advantage.”
Working with regulatory authorities
National rules are not necessarily interpreted uniformly across the country, and having a relationship with a central regulator is certainly not the same as understanding local requirements. In this area, too, strong bank relationships can be beneficial.
“For example, cross-border payments are a particular challenge for us”, says Jason Wang. “When making trade or non-trade payments, you have to provide a lot of supporting documents to local authorities, and there are quite tight timelines. Even normal payments which are agreed on a 90 days basis can become impossible to make on time.”
Good relationships with local banks can help here. International transfers may be smoother and less bureaucratic if banks have a good working relationship with relevant local authorities. In this case, SAFE [the State Administration for Foreign Exchange] needs to be contacted. The local branch gives permissions for activities including the import and export of cash and registering shareholder loans or foreign loans. Although the corporate may have contacts with SAFE at a national level, the local branch makes the decisions. Simply understanding the views from Beijing is not sufficient.
A banker who wished to remain anonymous told Treasury Today in China that all treasurers need to take into account the experience of each regulator. “In Shanghai or Beijing, regulators are much more experienced and responsive to a corporate’s needs, but other cities’ officials are less efficient. In terms of resources, extra time in particular must be allowed for such negotiations to take place.”
HSBC’s Kee Joo Wong says that when selecting a bank, it is important to make sure the chosen bank has a good understanding of local regulations which have most impact on the company’s specific treasury operations: “By keeping in close contact with regulators we can better serve our customers because we are aware of any regulatory changes as soon as they happen. In China, local regulations are constantly adjusted to meet the dynamic challenges from external factors like hot money flows, as well as internal factors like domestic liquidity. We play a key role advising corporates in this area, communicating with the regulators to help them understand business’ issues and challenges as well.”
Such regulatory issues have an impact that western corporates moving into China may not have accounted for. Extra staff, for example, will be required to work with both banks and regulators to maintain relationships in a way which is not seen in the west. This is particularly important for pan-national corporates, who need relationships with these authorities in each of the regions in which they operate.
Though the current regulatory system may pose certain challenges – particularly to firms expanding into China – there is some possibility of regulations becoming less onerous. Pui Yee Lee, Director, International Treasury, at Honeywell believes the regulatory changes in China have been positive and the pace is quickening. “The regulatory environment is constantly changing in Asia, and the attention will continue to be focused on China,” she told Treasury Today in China.
J.P. Morgan’s Lisa Robins agrees. “If we look at the last year and a half, there is the liberalisation of the RMB. China is starting out with the current account, and we are seeing a gradual liberalisation of the capital account and the interbank capital market, although the speed of these changes is open for discussion,” she says.
That is not a view shared by Henkel’s Jason Wang, however. He feels the government is tightening regulations in certain areas: “They are focused on liquidity issues, preventing ‘hot’ money flows in and out of the country.” In such circumstances, it is particularly important for the company’s local bank to have strong links with local SAFE regulators.
The message from treasurers and banks alike is that it is important to stay in regular contact with the banks – this is the most effective way of ensuring that banks can meet treasurers’ needs as accurately as possible, while helping treasurers to navigate regulatory changes.