Asia is so heterogeneous in terms of regulations and currencies that typical treasury management strategies may not always be effective. Keeping abreast of the many regulatory developments can be mind boggling, but not insurmountable.
The disparity across the various countries that make up the Asian continent can make keeping pace with the barrage of new regulatory measures a challenge. Whether an Asian firm or a western multinational company (MNC) operating in the region, the conflicting stages of regulatory adoption and various practices can cause great difficulty for treasurers when it comes to managing their cash effectively and efficiently.
The Asia Pacific region is a large area with many countries, cultures and business practices and is difficult to assess as just one region, which is often underestimated by foreign finance professionals. According to Mikko Sopanen, Director of Global Finance and Treasury at Liteonmobile, “It cannot be seen as one and therefore it can be called fragmented. Due to the early economic development stage of most of the countries, the banking and those related activities can also be very different and heavily regulated.” Therefore, Sopanen explains, this confusion can extend to the banks, as many financial institutions must follow their home country practices and regulations, even when they operate in different countries.
“A Taiwanese bank’s trading desk in Singapore, for example, must follow Taiwanese regulations and practices in addition to the Singaporean regulations. So there can be double regulations to follow and those are also impacting the customer with regards to trading limits, transaction alternatives and forms,” he says.
There is then a domino effect in terms of regulatory adherence, leaving the corporate more tangled and constrained than ever. As the space is constantly evolving, this makes it even more difficult for those thinking of establishing or maintaining a hub in this region with its shifting goal posts and crisscross web of rules.
The same, but different
Alain Bridoux, International Business Consultant and former CFO at Asian-based firm, Sandvik, believes that the countries of Australia and New Zealand “belong pretty much to the global treasury systems and thinking modes of western MNCs. Yet China and India are two huge and different markets with specific issues. Then there are Singapore and Hong Kong, which play somewhat similar roles for treasury matters with regional treasury centres,” he says.
In one respect, operations in Asia are similar to those applied by firms elsewhere in the globe; cash management projects for corporates based there, like their Western counterparts, are primarily focused on seeking incremental efficiencies through streamlining and optimising their existing processes. However, while adhering to the onslaught of constant regulation, there is also another irritation for the corporate, regardless of the location, Asia is unique in the fact that its ‘ghettoisation’ adds yet another layer of complexity to this regulatory compliance.
The right solution
Due to currency restrictions and the lack of a single currency for business flows, liquidity management options in Asia remain limited to domestic, in-country structures. Some exceptions to this include US dollar cash concentration structures across some of the more liberal jurisdictions, and, relatively recently, the participation of some Asian currencies in global cross-currency notional pool (CCNP) structures.
Globally, there is growing interest in CCNP solutions amongst companies with substantial liquidity in some parts of the world and the need to borrow in some others. The value of such solutions is impaired in Asia because some of the most relevant currencies, including the Indian rupee (INR) and the Chinese renminbi (RMB), are ineligible to participate in such structures due to regulatory restrictions. Bridoux highlights that the regulation of over-the-counter (OTC) derivatives foreign exchange (FX) controls have been an essential difficulty for China and India thus far. This could present too great an obstacle for some.
“For risk management reasons, decentralisation of derivatives use is not advisable for China or India, but centralisation proves difficult. In my experience, this explains why many MNCs are still leaving China and India aside and do not seek full optimisation,” he opines.
Sopanen, on the other hand, disagrees, stating that an MNC’s treasury and dealing team can locate anywhere and conduct operations across the Asia Pacific region with some minimal local administrative support, allowing them the best of both worlds.
“The OTC trading without the direct cash flow connection is centralised so it is easy to manage with good counterparties and efficient tax optimising. Therefore, it is pretty easy to change the trading location for an MNC to the most efficient place to avoid, for example, the increasing regulation.”
Yet he concedes that “the Asian economy and business landscape are developing and changing rapidly, the governments and regulators have a huge challenge to cope with and to follow this development”.
“For this reason, it can to some extent be a juggling act to manage and control the economic development along with the increasingly regulated areas of banking, FX transactions and financing.”
Relaxing the rules
Paradoxically, as the landscape is changing at such an incredible rate, some of these developments can actually have a positive impact for western MNCs operating in the region, and for the global economy at large.
The culture gap
Interestingly, Bridoux believes that there is a cultural aspect to the regulatory phenomenon across the Asia Pacific region, and that this adds to the challenge of carrying out efficient operations there.
“In my opinion, few Scandinavian companies have been very successful in China. The regulatory aspect is in itself also a culture issue. In both China and Singapore there are now new regulations that make it more difficult for Westerners to operate in the country. Singapore has imposed new restrictions on the qualifications and degrees that are necessary in order to be eligible to be appointed CFO of companies. Residence permits have also become subject to new restrictions regarding salary and the impossibility of sourcing a local recruit with the same experience.”
In China, the application for the Z permanent visa has become more restrictive. There are also indications that the previous policy of rarely indicting Western executives for corruption or breaches of regulations is over. Several Western executives have recently been personally sued with the verdict awaited with some anguish from the expat community. Some state agencies (SAIC) can also decide unilaterally to ban some individuals from exercising certain corporate functions. Practically speaking, this can mean that the person has no other option than to resign and return to their home country if permitted to leave China.
The establishment of free trade zones have been very successful for China, for example, although the long-term benefits remain to be seen. Other countries are now experimenting in the same way, according to Bridoux. “The Shanghai Free Trade Zone (FTZ), inaugurated in September seems to eliminate the concept of restricted or forbidden activities which led MNCs to joint ventures which frequently proved to be highly disappointing. The Shanghai FTZ could potentially wipe out the benefits of having regional treasury centres (RTCs) located in Singapore and Hong Kong. Obviously, the relocation to Shanghai of regional staff might prove lengthy or inconvenient but the profits derived by banks from trading offshore yuan (CNH) might come to an end if the zone proves successful,” he continues.
The optimism for a more relaxed business landscape is growing. In August, the Chinese Ministry of Commerce released a policy that aims to take measures to improve cross-border, e-commerce retail and export. The new policy took effect on 1st October and strives to promote growth in cross-border e-commerce, which is a long overdue development, as e-commerce in the nation has far outgrown existing domestic regulations. Cities including Shanghai, Chongqing, Hangzhou, Ningbo and Zhengzhou were amongst the first to implement the new policy.
Furthermore, in the same month, the Chinese central government and the Hong Kong Special Administrative Region government signed a new supplement to an economic accord to boost trade and economic co-operation and exchanges (CEPA). A US Securities and Exchange Commission (SEC) survey earlier this year demonstrated that the combined fund management business in Hong Kong rebounded significantly to a record high of HKD12,587 billion (about $1,622 billion) as of the end of 2012, representing year-on-year growth of 39.3%.
Sopanen also welcomes the apparent relaxation of ‘red tape’ rules in the region, as India is reportedly set to discard its global image of being inflexible in cross-border tax negotiations. This is a result of the announcement that New Delhi is to sign bilateral deals with the tax authorities in the US, the UK and Japan. The Indian government intends to accept corporate disclosures of profitability and tax liability of 29 MNCs without dispute for five years, so long as these are computed on the basis of mutually agreed principles.
“In some cases there are reduced documentation requirements related to cash management and payments, especially in India. There are also less tax related issues and regulations, when certain operations in the FTZs are also free of tax,” says Sopanen.
The upgrades in the free trade agreement are, perhaps most importantly, being given the stamp of approval from authorities in the region. Singapore’s Foreign Minister K. Shanmugam declared at the end of August that all ten members of the Association of South-East Asian Nations (ASEAN) were supportive of enhancing the free trade agreement between China and the ten-nation bloc. With China one of ASEAN’s strongest strategic partners, Shanmugam said at the time: “I think as we prosper, as we increase our trading relationship, as we increase our connectivity, we can go much higher ... for the benefit of China and ASEAN, and an enhanced free-trade agreement will help us to achieve that.”
Asia is renowned for being quick to adopt innovative banking technology. For example, Asia is leading the world market in the adoption of mobile payment authorisation, internet-based banking and cashless delivery in the retailing industry. The way in which the region embraces technology with such vigour can be quite helpful when it comes to handling the strict regulatory environment, says Bridoux. “Cloud computing and new treasury global systems have definitely been useful to circumvent some regulatory obstacles.”
Sopanen agrees that streamlined infrastructure can assist in conquering some of the challenges in operating a treasury system in Asia. “When it comes to fulfilling all of the regulatory reporting requirements, automatic reporting systems are an enormous help in keeping to reporting schedules and decreasing the workload. Furthermore, the reports are now more accurate and less auditing and checking is required.
“Many banks also have e-platforms for documents and confirmation signing, which helps a lot, particularly when the signatory persons are all around Asia and travelling around the world. They can now sign and confirm online, independent of the location,” he continues.
Despite the technological advancements, however, Sopanen is surprised to see that many large MNCs are still relying upon Excel spreadsheets for treasury management. He also highlights some concerns about the availability of notional cash pooling for some of the banks’ ‘best clients’. “This does not benefit their local units and there is a lot of internal resistance,” he says.
“It is also true that, from a local standpoint, these offers break some FX rules and that bank executives can become personally liable if the breach is proven.”
Has interest waned?
Despite such restrictions around liquidity and inter-company transactions, many corporate treasurers have been able to extract efficiency from Asia through regional strategies, by focusing on operational and process benefits as opposed to liquidity benefits alone. For example, implementing a regional solution for payments and collections, aligned with their shared service center (SSC) and RTC strategies, usually results in significant reductions in operational costs, improved efficiencies, standardisation of practices and better controls.
As a result, according to Bridoux, the number of Western hubs across the Asia Pacific region continues to increase. However, some reticence remains as, “their localisation is subject to a lot of internal politics and self-interest attitudes. Very few Western executives feel like relocating to China and try to prove that the Asia Pacific region should be managed from Singapore or Hong Kong.”
Regional hubs far away from the main business units are very often not creating any value and just act as a conduit to the ultimate parent company so a new trend is emerging, with global SSCs opening in China, says Bridoux.
“This would obviously be a major change in the way MNCs operate. Political reasons probably exclude that critical data and services can be totally dependent upon a country where the intervention of the state could paralyse all operations.”
Nevertheless, it is certainly an interesting concept. Sopanen feels that the regulatory battlefield across Asia doesn’t appear as complex in recent times as the environment on the western side of the world has almost become as complex, in fact in some ways worse.
“Europe and the US are starting to heavily increase their regulation and reporting requirements as Asia has done already in the past. There are also discussions around the transaction taxation in Europe. These trends are actually making it easier for companies to decide to locate in Asia and to deal with the Asian requirements, especially when most business growth for many industries is also on the Asian market,” he points out.
It’s not going to be straightforward for those doing business in the region to meet all these new requirements, particularly considering that many of the economies and financial markets in the region are still developing. As regulations consume corporates at a global level, many feel the APAC challenges are nowhere near as challenging and off-putting as they can first appear.