Cefi Chen has been at the forefront of the treasury profession in China for nearly 15 years and during this time she has witnessed some major changes. In this article, Chen discusses the growth of the treasury profession in China. She also explains why the current challenging macroeconomic conditions are providing opportunities for treasury to develop further.
Regional Treasury Director, China and Russia
Headquartered in Columbus, Indiana, USA, Cummins employs 55,000 people worldwide. The company serves customers in 190 countries and territories through a network of 600 company-owned and independent distributor locations and 7,200 dealer locations.
For years China has been the world’s economic success story, as it has transformed from a centrally planned closed economy to the manufacturing and exporting hub it is today. But in recent years the tide has turned somewhat for the world’s second largest economy.
The double-digit growth is no more – China’s economic growth in 2015 was the lowest in 25 years. The country is also in the midst of a structural shift as policymakers look to pivot away from manufacturing and exports, focusing instead on services and domestic consumption. Dubbed “the new normal”, the aim of this shift is to foster stronger, better-quality growth that is more widely distributed amongst the population.
It is a painful transition though, and headlines detailing the risk of a hard landing, toxic debt, real-estate bubbles and zombie companies are commonplace. And the world is watching, as any moves by Chinese policymakers send ripples through financial markets around the world. Black Monday, in August 2015 – when the Chinese stock market collapsed and billions of pounds were lost on international stock markets as a result – is just one example of this.
Taking on the challenge
For many businesses on the ground, it is a challenging time. Instability is the order of the day; new risks are emerging and old risks are intensifying as businesses adapt to the new normal. But with challenge comes opportunity, and now may be the time for the corporate treasury department to step up and help guide organisations through these uncertain times.
This is certainly the view of Cefi Chen, Regional Treasury Director, China and Russia at Cummins. According to Chen, the present situation is reminiscent of the 1997 Asian Financial Crisis, which was when the treasury profession first emerged in China.
“Back then there was a need for treasury skills that many companies didn’t have,” says Chen. “Today I see organisations looking at the corporate treasury departments that they have built over the past two decades, wanting them to take a leading role in supporting the business navigate through the difficult conditions that currently exist.”
Chen is well placed to provide commentary on the growth of corporate treasury in China, having worked in the profession for 14 years. Indeed, Chen was probably one of China’s first specialised treasury professionals.
Prior to this, Chen worked for the China Merchants Bank at a time when the Chinese banking industry was going through a period of development. She says that this was an exciting time both personally and professionally, noting that she was afforded the opportunity to move through the company and get a taste of all areas of finance. “I was able to pick up a variety of skills along the way and became a well-rounded financial professional as a result of this rotation,” she adds.
It was from Chen’s position in the bank that she witnessed the impact of the Asian Financial Crisis, especially on importers and exporters in China. “By working with these companies, I began to realise that few had the expertise in-house to manage cash and risk,” she says. “Some organisations were therefore badly impacted by the currency fluctuations at that time.”
Among these challenges, Chen spotted an opportunity. “After seeing these events unfold I considered moving away from banking and into the corporate space,” she notes. “I believed I had a wealth of knowledge that could add value to an international company operating in China.” And in 2002, Chen made the move into the corporate treasury profession, leading the country treasury team for IFF China before moving to ABB and eventually Cummins in 2010.
“My treasury team does not sit here and wait for the business to tell them of their requirements. We are proactive, going out into the business to find out what is happening and what the challenges are. From here we can offer services and solutions that help solve these issues.”
“When I assumed my first treasury role, the profession was only just beginning to emerge in China,” comments Chen. “It was primarily seen as a back office support function looking after cash management, financing and monitoring regulation – few within the company knew what we were doing.”
Since these formative years, Chen has seen major changes. For one thing, rapid international growth has led many companies in China to become more complex. Consequently, the treasury profession has become more prominent within these organisations as the need for prudent risk management and financial control has increased.
The rigorous regulatory regime in China has also played a role in building up the profession. “There is a lot of regulation that companies have to adhere to in China, especially when doing cross-border business,” explains Chen. “Treasury has become specialised in monitoring these and making sure that the business is compliant.”
A proactive role
Treasury is now a well-respected function in China, but Chen is not content for the development of the profession to stop here.
Within her own company, she has strived to ensure that treasury is doing all it can to support its growth. By looking after cash management, bank facilities, loan arrangements, risk management, credit management, taking an active role in capital investment projects and monitoring the regulatory environment, Chen’s role is already multi-faceted. In recent years she has also looked to pull the department closer to all corners of the business and to partner on projects which facilitate further sales and revenue.
“My treasury team does not sit here and wait for the business to tell them of their requirements,” she says. “We are proactive, going out into the business to find out what is happening and what the challenges are. From here we can offer services and solutions that help solve these issues.” For Chen, it is by operating in this way that treasury can show its full value.
Chen cites her team’s recent supplier finance project as a good example of this. After conducting industry benchmarking, her team realised that some of the company’s suppliers were already onboarded onto supplier finance programmes offered by their other customers. Chen went to the business and suggested that Cummins should look to offer a similar service.
“It makes sense to pay our suppliers early and receive a discount if we have surplus cash,” she says. “Our suppliers will also benefit because it will enable them to improve their working capital metrics and have access to cash sooner, allowing them to build better products and sooner. This ultimately benefits Cummins.”
As well as helping the organisation do more business, the Cummins China treasury team has also played a pivotal role in shielding the organisation from the risks that are present in the country.
The slowdown in the economy and the broader structural shift is challenging companies in China – especially manufacturing companies like Cummins. Chen says that credit conditions for Cummins’ downstream customers and upstream suppliers is a major concern.
The latest report by French credit insurer Coface outlines the challenge that treasurers such as Chen are facing, noting that 80% of Chinese businesses were impacted by overdue payments in 2015. According to the report, 58% also reported an increase in the amount of overdue payments over those received in 2014.
For Chen, the difficult conditions that many companies are experiencing are highlighted by the increasing use of the Bank Acceptance Draft (BAD) as a payment instrument. A BAD, which is similar to a guaranteed cheque, is a guarantee from a bank that payment of a debt will be paid on a future date that can be up to six months if issued on paper or a year if issued electronically. Originally intended to facilitate trade, BADs are now widely used by companies as a secondary currency that helps them meet payment obligations.
“Receiving these from our customers negatively impacts our days sales outstanding and overall working capital cycle,” says Chen. “There is also a cost to managing these documents.” What is more, the credit risk is intensified when the company receives BADs that are issued from obscure financial institutions – something that Chen says has become far more common in recent months. “We have little visibility over these institutions and if they will not pay, holding these is a big risk,” she notes.
To mitigate the risk posed by these BADs, it has been necessary to pass some BADs on to the company’s suppliers as a means of payment – something that Chen admits the company is not keen to do. “Compared to the market average we pass on a limited amount of BADs to our suppliers,” she says. “Although it would be a relief to pass on all BADs, this would ultimately impact the business negatively in the long run and our aim is to treat our counterparties well.”
To develop a longer-term solution, Chen has worked with the management team in China and colleagues in the US to establish a company-wide credit policy. This policy outlines exposure limits and the instruments the company is willing to receive as payment, and from whom. To ensure that this revised policy is effective, Chen has also made sure that all the business units understand their role in enforcing the new policy when dealing with counterparties. “Risk is not something that treasury and finance can manage in isolation,” she notes. “The business units are the first line of defence; everybody has a role to play.”
Chen doesn’t expect credit conditions in China to improve any time soon. In fact, she expects the use of BADs to increase. “The regulators have removed the need for electronic BADs to be supported by a contract invoice used to show that the instrument was supporting a genuine trade transaction,” she explains. “I fear that this will see the usage of the instrument increase and potentially create more opportunities for fraudulent activity.”
Elsewhere, FX is a growing area of focus for Chen and her team. “The RMB now fluctuates two ways – this is the new normal,” says Chen. “To manage this effectively, we need to have more access to hedging tools onshore. These are limited at present, and I hope that this is something that the regulators will recognise and allow soon.”
The final area on Chen’s radar is cyber-risk. As with most companies, an increasing amount of Cummins’ business takes place through digital channels and whilst this brings many benefits, Chen is fully aware of the risks. “There are lots of scare stories in the news and it is a big concern given the complexity of the risk,” she says. “All businesses must remain cautious of the dangers and we are working to proactively manage these.”
Cummins’ banking partners are providing support in this area by helping the company understand cyber risk and build effective mitigation strategies. Banks can also provide valuable input when it comes to understanding and complying with changing regulations. “The regulators publish new rules from time to time to normalise or standardise the operations of all participants in the banking industry, so banking partners play a strong role to explain these new rules to us, helping us understand the reason for these rules and to ensure we are compliant,” says Chen. “Due to the regulatory complexity in China, corporates and banks have an intimate relationship that is perhaps not as necessary in other countries.”
More broadly, Chen has found that local and international banks have different strengths. As such, the company works with both types of bank. “Local banks are better placed to assist with in-country business,” she says. “The international banks, on the other hand, can provide a global perspective and advise on international best practice and standards.”
To ensure that Cummins continues to receive a good service, Chen makes sure she is open and honest with the company’s banks. “We want to operate on a win-win basis,” she explains. “And we will remain loyal to them if they continue to provide the right products and services.” Chen also says that she likes to push her banking partners to think “outside of the box.” She likes to challenge them to build innovative products that can help treasurers across the country support their businesses better and show the value of the function.
This desire to continue developing the treasury profession in China is key to Chen’s future plans. After being at the forefront of development for the past decade and a half, she feels a strong connection to the future of the profession. “I have enjoyed every moment working as a corporate treasurer,” she notes. “It is a very rewarding career and I hope to show that to the next generation of treasury professionals.”
To do this, Chen is planning to spend more time training up staff within Cummins and the wider treasury community. She also plans to continue to educate other people within the business about the treasury department. “It is important that all business units know what the treasury function does and how we can work with them to help achieve their objectives,” she concludes.