Treasury Today Country Profiles in association with Citi

Flowing eastwards

Three fast cyclists

It is not just China and India that represent opportunities in the East – South-East Asian markets are growing exponentially and are hungry for foreign investment. While these markets may not yet be a large part of an MNC’s P&L, they certainly will in the future.

Significant changes in the relative size of the world’s economies will take place during the next 50 years, according to the Organisation for Economic Co-operation and Development (OECD). In its November 2012 economic policy paper, ‘Looking to 2060: Long-term global growth prospects’, the OECD predicted that fast growth in China and India will soon make their combined gross domestic product (GDP) surpass that of the G7 economies and exceed that of the entire current OECD membership by 2060.

Growth in non-OECD countries will continue to outpace the OECD average during the period, although the difference will narrow over coming decades. From more than 7% per year over the past decade, non-OECD growth will decline to around 5% in the 2020s and to about half that by the 2050s, according to the report. Until 2020, China will have the highest growth rate among the countries included in the study, but will then be surpassed by both India and Indonesia. This partly reflects a more rapid decline in the working-age population, and consequently in labour force participation, in China rather than in India and Indonesia.

In the more immediate future, the OECD’s ‘Interim Assessment’ of the global economic outlook, published in March, confirms that growth of emerging economies remains much faster than that of advanced countries on average (albeit with significant differences across countries). The report predicts a return to “moderate growth” in the US during the first quarter of 2013, while a “meaningful recovery” is likely to take longer in Europe.

“Given the substantial share of the world economy now accounted for by emerging economies, they will again drive growth at the global level this year,” says the report. “Annualised growth in China is expected to continue to be well above 8% in the first half of 2013.”

The United Nation’s (UN) assessment of the global economy for the coming year is rather more downbeat than that of the OECD. Its ‘World Economic Situation and Prospects 2013’, published in December last year, highlights that economies in developing Asia “weakened considerably during 2012” as the region’s growth engines – China and India – shifted into lower gear. “While a significant deceleration in exports has been a key factor behind the slowdown, both economies also face a number of structural challenges that hamper growth,” states the report. “Given persistent inflationary pressures and large fiscal deficits, the scope for policy stimulus in India and other South Asian countries is limited.”

China and many East Asian economies, in contrast, possess much greater space for counter-cyclical policy. In the UN’s outlook, average growth in East Asia is forecast to pick up slightly to 6.2% in 2013, from the estimated 5.8% in 2012. GDP growth in South Asia is expected to average 5% in 2013, up from 4.4% in 2012, led by a moderate recovery of India’s economy.

While there may be differences in the details, it would be difficult to argue with the idea that developing – or emerging – economies are where the growth is. The moribund economic climates of many of the Eurozone countries, along with those of the UK and the US, do not present attractive platforms on which corporations can grow.

Data collected from purchasing managers across the Eurozone during March 2013 indicate a deepening of the downturn in the currency union, according to Markit’s Purchasing Managers’ Index (PMI) published in April. Output and new orders fell at stronger rates, driving further job losses. PMIs fell in almost all countries, with a modest decline in Germany, accompanied by steep downturns in France, Spain and Italy.

East Asia evolves

The austerity-hit developed economies stand in stark contrast to the vibrant and dynamic countries of the world’s Eastern hemisphere, which is characterised by younger populations and growth-friendly economic policies. In the past few years, the idea that the East was a region from which to source cheap labour, has given way to a realisation that it is also a region of other opportunities, with burgeoning consumer markets and in some cases very significant infrastructure projects under way.

“Asia is becoming the global engine of economic growth, a position further highlighted since the global financial crisis,” says Sameer Sawhney, Global Head of Transaction Banking, ANZ. “This growth is sustainable and an increasing number of Western corporations are looking to Asia as a key growth market for their businesses.”

For example, San Francisco-based GAP, one of the largest clothes retailers in the US, began an aggressive expansion into China in 2011 as part of a global strategy. The company plans to have around 45 outlets in China by the end of this year as it seeks to reduce its dependence on North America, where consumer confidence is volatile.

Diane S. Reyes, Global Head of Payments and Cash Management at HSBC, says the bank is “bullish” about China’s outlook; the country has been a key contributor to world economic growth and that looks set to continue with more than 7% GDP growth for 2013. “Firms that want to grow in the global economy should be involved in China and using the renminbi (RMB),” she says. “Currently, more than 10% of China’s international trade is settled in RMB, and by 2015 we expect that over one third of all international trade transactions with China will be denominated in RMB.”

As a very big consumer-oriented market, there are “tremendous” opportunities in China for retail companies to expand, but they need to understand the market and its settlement conditions, and potential complexities that vary city by city.

Reyes says the pace and scale of urbanisation in China is extraordinary. “This trend therefore provides significant opportunities for companies involved in infrastructure development as China continues to invest heavily in housing, transportation, telecommunications and other infrastructure projects to enable people to move into cities.”

In September 2012 China’s economic planning authority, the National Development and Reform Commission, announced approvals for 60 infrastructure projects worth a total of $150 billion. The projects include highways, ports and airport runways. Financial news service Bloomberg reported a surge in the share price of infrastructure companies around the world following the announcement, with Japanese and US companies recording significant jumps.

China is not the only country that is going for infrastructure growth as governments throughout the region instigate large-scale projects. The Indonesian government, for example, has announced plans to float tenders for several medium-to-large infrastructure projects worth $7.6 billion in 2013. The move, aimed at boosting economic growth, will cover projects such as toll roads and dams, construction of which is expected to begin by 3Q13. In Vietnam, the government has announced a large project to build a high capacity electrical transmission line for 437kms across a number of provinces and through to Ho Chi Minh City in the south. It aims to ensure electricity supply to the southern areas of the country by 2014-2015, as well as power grid connectivity across Vietnam, Laos and Cambodia by 2015.

Beyond China

It is not just China and India that represent opportunities in the East. In a 2011 report, ‘The Time for Regional Expansion is Now’, Accenture identified South-East Asia as an emerging prime business destination in Asia. Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam offer multinationals new markets in which to pursue growth, the report says. After India and China, South-East Asia is regarded as the third pillar of Asia as a whole.

Accenture says the region is perceived to be a long-term destination that will remain on the periphery of an Asian strategic agenda for a majority of businesses outside the region, but at the centre of expansion plans for native businesses seeking growth closer to home.

“We believe businesses that position themselves now for growth in South-East Asia will be rewarded by finding themselves in the middle of a new ‘centre of gravity’ within future high-growth markets,” says the report. “South-East Asia has the clear potential to become an alternate hub to China within the Asian region. It offers new opportunities for international companies and can act as a launch pad for local businesses seeking to become regional or global leaders.”

Businesses that are gravitating towards expansion into South-East Asia should focus on four key imperatives:

  1. Adopt a regional mindset.

  2. Develop strong partnerships.

  3. Adapt from the core.

  4. Move with agility.

Because of its sheer scale China dwarfs every other country in the region, says Sawhney. But from a strategy point of view, other markets of interest include Indonesia, the Philippines, India and Vietnam. “These markets are growing exponentially and have stable political and regulatory environments and are hungry for foreign investment.”

Domestic markets in the East are becoming more vibrant; India has a population of 1.3 billion and Indonesia has 230 million people. “We are moving away from the term ‘emerging market’ to one of ‘growth market’,” says Sawhney. “While these markets may not yet be a big part of a company’s P&L, they will be in the future. In Vietnam, for example, 65% of the population are under the age of 20.”

Challenges

Expanding into Eastern markets is not without its challenges, of course. “Asia today is very much like Europe of the 1980s and 1990s – it has many different markets, economies, currencies and taxation regimes,” says Richard Jaggard, Managing Director and Head of Transaction Banking Europe, Standard Chartered. “Corporate treasurers’ first challenge is how to manage such complexity – many have gone down the regional treasury route, others are managing Asia from their European or US headquarters. As their scale of business grows in Asia, treasurers realise they have to put more high quality resources into the region in order to manage the increased complexities and risks that come with commercial growth.”

Corporates want to use the structures they have developed in the West and blend them into Asia, says Jaggard. For example, they are looking to ‘bolt on’ Asian operations to the liquidity structures they have developed in Europe. This will enable them to centralise cash from the region – some are doing this via a regional treasury centre (RTC), others are looking to integrate into a global structure. For non-mobile liquidity, corporates are focused on in-country efficiency via approaches such as yield enhancement based on aggregated positions within the region.

ANZ’s Sawhney says there are changes afoot in Eastern markets that make them very interesting for corporate treasurers. “In the past Asia was a factory for the world with uni-directional flow to the West, as companies sourced from Asia. There was no significant currency risk as the majority of transactions were in US dollar or euro. Now, however, there is increasingly a two-way flow as companies look to supply to Asian markets. Funding flow and allocating capital are becoming key differentiators.”

RMB strategies

Corporations looking to do business in the East will at some stage have to develop a strategy for China’s currency. “The internationalisation of the RMB is posing issues for corporate treasurers to work through in terms of managing investments and cash,” says Sawhney. “To date there are still only three fully convertible Asian currencies – the Hong Kong dollar, Singapore dollar and Japanese yen. The biggest growing markets in the East – China and India – do not have open currencies.”

HSBC’s Reyes says the Chinese regulators are looking to ease currency inflows so corporates can raise RMB funding in Hong Kong or another market, and use that to fund projects in China. This will help corporates to limit their foreign exchange (FX) exposures. “A challenge when dealing with the RMB is whether to go onshore, with accounts in China, or offshore in Hong Kong, for example,” she says.

Jaggard says a significant challenge for corporations doing business in China is what to do with the cash they generate there. “During the past few months the Peoples’ Bank of China (PBoC) has taken a few more steps in its RMB liberalisation programme, such as the ability to make short-term foreign currency loans. This will help.”

In April, Australia became the third country, after the US and Japan, to seal a currency deal with China. It means the Australian dollar can be converted directly into RMB. China is Australia’s main trading partner, with exports and imports totalling A$120 billion in the last financial year.

A survey of 500 small and medium-sized enterprises (SMEs) in Australia, conducted by HSBC, found that 40% of companies importing from or exporting to China intend to settle transactions in RMB during the coming year. The currency deal between Australia and China will reduce costs, as firms will no longer have to convert via the US dollar. According to the survey, 31% of SMEs plan to use both US dollar and RMB, and 13% intend to exclusively use the Chinese currency. “Given China represents over 20% of our current trade and is expected to grow by 8.5% per annum to 2020, the RMB’s role within Australian trade will inevitably rise,” said HSBC Bank Australia Head of Business Banking, Paul Edgar, in a statement. “It is clear from the survey that Australian SMEs are getting ahead of the curve.”

Treasury strategies

Growth rates in the faster growing economies are very attractive, but treasurers realise they need to develop efficient infrastructure that will support growth, says Jaggard. “Centralisation through the development of skills centres, such as RTCs, provides the opportunity to identify and manage financial risk, while shared service centres (SSCs) focused on accounting and payments provide processing efficiency gains as well as quality in information management. Both are important parts of building scalable platforms for growth regionally, and increasingly globally,” he says.

Most of the multinational companies (MNCs) now operating in the East realise that it is not possible to run a global treasury to cover everything centrally out of one market, says Sawhney. “There is a huge amount of activity with companies opening RTCs to take advantage of the depth of the markets in terms of liquidity, currency and interest rates. There is also significant advantage in being in the same time zone.

“Asia is awash with liquidity and represents a big opportunity to run medium to long-term money at attractive prices”, he adds. Companies realise they can fund business from the liquidity pools in the regions where they are growing.

Sawhney cautions companies entering Eastern markets to ensure they understand the relevant regulatory and cultural environments. “The pace of change is so rapid in the region that what might have been best two years ago is no longer the case. I believe that this is why regional banks are gaining in importance – partnering with a local bank in each country is too unwieldy, so working with regional banks that have a strong footprint across countries is key.”