As Asian multinationals continue to expand across the region, the incentives to centralise their treasury operations into regional treasury centres (RTCs) are hard to ignore. A centralised treasury centre can reduce processing times, simplify cash flows, reduce headcount and avoid unnecessary duplication, yet setting one up poses numerous challenges.
Western multinational companies (MNCs) have become somewhat accustomed to the establishment of regional treasury centres (RTCs) in and outside of their home markets. Their Asian contemporaries have, so far, been somewhat more reticent. That distinction may be abating. With Asian giants Sony, Huawei and Lenovo, to name just three, already having made this leap, what are the options, difficulties and regional trends surrounding this development?
Singapore leads the field in terms of a location for a RTC and this does not seem likely to change anytime soon. Some of the world’s largest companies, including DuPont and DHL, have already located their RTC in Singapore. Unilever has taken its treasury operations a step further by consolidating its former RTCs into a global infrastructure for operational treasury activities, called global treasury operations (GTO). The cornerstone of this infrastructure is the World Treasury Centre (WTC) in Schaffhausen, Switzerland. In the WTC, all daily funding, investment, liquidity and foreign exchange (FX) management activities are executed with internal group companies and external counterparts.
In Treasury Today’s 2012 Asia Pacific Corporate Treasury Benchmarking Study (see Chart 2), 51% of Asian corporates surveyed cited Singapore as the preferred location for sub/regional treasury centres for the Greater China region, with Shanghai coming in second at 46%, Hong Kong third at 43% and Beijing last with just 7%.
The same study also asked respondents about their anticipated timeline for the CNH/CNY actively being used for inter-company and third-party trade settlements (see Chart 1), which is an important consideration for any company establishing a RTC in the region with interests in China. Over 60% of respondents think this will happen within the next three years.
Traditionally Asian MNCs with a strong global presence were to be found based in Japan and Korea. Taking a closer look at the first example, Japanese MNCs were historically inclined to practice a far lower level of treasury centralisation than Western MNCs. In 2005, Japanese car manufacturer Nissan established a RTC in Singapore, yet Nissan’s Japanese contemporaries did not exactly rush to follow them. However, Gourang Shah, Citi’s Head of Treasury Advisory for Asia Pacific, says that “this reticence is being put under pressure by the strong competition that Japan is now facing from China, Taiwan and Korea. As a result of this, Japanese corporates are increasingly looking to centralise their treasury operations and today corporates from China and India and to a lesser degree other Association of South-East Asian Nations (ASEAN) countries, are expanding their global footprint.”
With the expansion of these countries comes an increasing interest in RTCs. The lure of a more cost effective and operationally efficient treasury department drives this interest, yet there is a level at which a company must be before they are ready for this step. Margaret Yao, Regional Sales Executive, Asia Pacific, Treasury Services, J.P. Morgan, notes, “in order to be able to go down the RTC road, these companies require senior sponsorship to drive the evolution and ensure a seamless re-engineering of their internal workflows, as well as have an ongoing commitment to investing in common ERP (enterprise resource planning) and TMS (treasury management systems).”
What should be done by these companies before they can be truly ready? Although there isn’t a one-rule-fits-all guide there are some generic indicators. “Lots of Asian companies still need to work on their treasury function, such as cash concentration, improving visibility and access to cash,” says Francois-Dominique Doll, Product Specialist, SunGard AvantGard. “Although it varies on a case-by-case basis, I would agree there are many areas for improvement, but they are catching up very quickly. European and US companies took five to ten years to transform their treasuries, whereas Asian companies are looking to achieve this within two years.”
Asian treasurers are well aware of best practice techniques. Even companies that haven’t centralised or transformed their treasury are aware of what is out there. However, this does require buy-in from top-level management as well as from the operating subsidiaries. “If they really want to remove any inefficiencies and improve working capital management, they will need to release resources in order to achieve that goal,” says Doll.
In Asia there are many restrictions in moving cash from one country to another and each country follows different policies in terms of cash management. Lenovo’s Treasurer, Damian Glendinning, explains that having cross-border loans is a major issue for corporates as many countries have FX rules. “When it comes to Asia, countries with no exchange controls are the exception rather than the rule,” he says. Only the Japanese yen, Singapore dollar, Australian dollar, New Zealand dollar and Hong Kong dollar are easily convertible outside of their respective home markets.
A typical regional treasury centre will perform some or all of the following functions:
Where to go
The reality is that there are few countries in Asia that offer the depth and open markets needed by RTCs. Historically choices have been – and still are – Singapore and Hong Kong. Shanghai is emerging as a third alternative, yet with FX controls remaining in place it is not necessarily an ideal location unless a corporate’s operations are solely in China. Australia used to be one of the first choices for corporates, given the language and the Western culture. However, its physical distance from the rest of Asia has resulted in many relocating their RTCs to either Singapore or Hong Kong.
Singapore will continue to be an attractive centre for MNCs due to its proximity to India and South-East Asian markets and its successful track record in market development, such as the derivative market and fund management industry. The nation’s English language proficiency remains its competitive advantage and its AAA sovereign rating is an important selling point in its establishment as a wealth management centre. The government is strongly committed to high-end management education and actively encourages employment of expatriates to mitigate possible talent gaps and support future growth.
Singapore has a deep and liquid FX market, an excellent pool of well-educated labour, and world class transport and telecommunications infrastructure. Over the past ten years the number of RTCs located in Singapore has grown steadily, with a surge in numbers since 2008.
The city state’s attractive tax benefits are a strong pull, particularly the many double taxation agreements (DTAs) they have negotiated with their trading partners. And, of course, Singapore is the region’s pre-eminent banking centre with a wide mix of readily spoken languages.
Up-and-coming, Shanghai has set a timetable to achieve international financial centre status by 2020. It is already the centre for the domestic renminbi (RMB) financial market in terms of the size of both the equity and bond markets. The volume of international cross-border flows is subject to the timetable of the liberalisation of the capital account. Currently the intermediation of capital outflow is through the Qualified Domestic Institutional Investors (QDII) scheme. Significant developments in the Shanghai financial markets are anticipated in the years to come.
Hong Kong can claim many of the same advantages as Singapore. Its currency, the Hong Kong dollar, is pegged to its US counterpart. It operates a ‘benign’ tax regime and a concentration of the world’s leading banks. It is home to over 1,300 bank branches and over 200 authorised institutions. These include a number of investment banks, which serve the debt capital markets. In 2009, Hong Kong’s banking infrastructure was updated and the SWIFTNet system replaced the previous high value clearing system, the Clearing House Automated Transfer System (CHATS).
For cash concentration activities, both Singapore, with its finance and treasury centre (FTC) incentives, and Hong Kong, have withholding tax on interest waivers but, for lending money, the applicable withholding tax rule is from the country that pays interest. Hence, DTAs help with withholding taxes.
An additional issue is the maturity of the infrastructure offered and the presence of a financial hub, which comes with service providers such as banks, tax and legal experts.
Managing Director of Acarate and former Vice President Treasury at Huawei, David Blair says he is seeing many Asian MNCs from South-East Asia, China and India setting up international treasury centres and RTCs in Singapore. “Motives vary but essentially they are looking for a real international financial centre not far from home,” he explains. Companies will often opt to set up RTCs in China or India if there is a large enough domestic presence to justify doing so.
Similarly, Hong Kong comes up as the preferred location for a RTC for North Asian companies, but observers note that more often than not, after the initial move to Hong Kong, even these companies prefer to relocate to Singapore for tax reasons.
Lenovo’s Glendinning adds an interesting note to the decision-making process stating that the criteria is often not based on hard logic. There is always a human element when deciding whether to set up a RTC and where. The human element is highlighted in the table which shows an interesting comparison between Europe and Asia in terms of the number of full-time equivalents (FTEs) employed in the treasury department. This perhaps illustrates the benefits of establishing a RTC. Almost 75% of respondents to the European Study were regional treasuries in Europe and just over half employ just one to four FTEs.
|Number of FTEs employed
|More than 12
Source: Treasury Today’s 2012 European and Asia Pacific Corporate Treasury Benchmarking Studies
Furthermore, whilst the establishment of a RTC, whether it is South-East Asia, China, India or Eastern Europe for that matter, requires sound technology, systems, people and robust banking partners. Treasurers should not underestimate the legal implications. The scope and jurisdiction of any RTC structure will impact its legal constitution so time spent thinking about the framework of an RTC is time well spent and vital to its ongoing success.
Another consideration for the location of RTCs is the legal system and its workings. Singapore, Hong Kong and Australia are common law systems, with precedence and transparency, and the courts, lawyers and judges are all independent of the government. China meanwhile is rapidly developing its legal framework but still has a way to go before the same levels of legal protection exist as with other international financial centres. A common legal framework is very important to protect financial transactions and structures that cross borders.
The objective pros and cons are not the only consideration; there is usually a fair amount of politics involved, personal preferences and agendas that can influence the final decision. If the hurdles can be overcome however, with the right structure and location the benefits can be worth the pain.
Finally, the environment also needs some attention and banks need to respond if they are to attract the cash management mandates of companies operating in the region. Here is just a small selection of the responses from RTCs in the region when asked: “What improvements should your service provider(s) be delivering?”
“Internet access on mobile, and capability to integrate with our internal IT-SAP system.”
Telecoms company based in Thailand
“Easier SWIFT connectivity, better multi-bank reporting.”
Agricultural commodities company based in Singapore
“Cash repatriation mechanisms for locations with trapped cash such as China, India and Korea.”
“Cash pooling for multicurrency for multi-country.”
Energy and natural resources company based in Singapore
Source: Treasury Today’s 2012 Asia Pacific Corporate Treasury Benchmarking Study
We would like to acknowledge the assistance of Russell Brown, Managing Partner, LehmanBrown, in the preparation of this article.