Due to its successful growth efforts, Honeywell (China) Co. Ltd had seen a significant increase in its group cash balances – 65% of which were denominated in RMB and the remaining 35% in US dollar.

“Our US dollar cash balances were highly decentralised, with balances being held in various bank accounts with different banks. This made it difficult to get cash visibility as well as the control that we needed from the treasury perspective,” recalls Linlin Wu, Regional Treasury Manager, Honeywell (China) Co. Ltd.

This decentralisation resulted largely from the regulatory framework surrounding foreign currency bank accounts in China. Using entrustment loans to manage company cash was ruled out as a viable option as the company considered the arrangements to be cumbersome.

As a result, the company decided to look for a suitable US dollar cash pooling arrangement to concentrate the company’s cash balances in China, reduce external funding costs and streamline bank relationships. However, as US dollar cash pools are a relatively new product in China, there were no suitable existing structures in place that Honeywell China could replicate.

After a rigorous RFP process, Citi was awarded the mandate for the cash pool. The solution that was put forward was based on a three-tier automated zero-balancing account (ZBA) entrustment loan structure with participants’ operational accounts in the lowest tier, loan accounts in the second tier and the pool header in the third tier. Using this structure ensures no co-mingling of funds and simplifies interest allocation. It is the first cash pool structure of this kind to be seen in China.

“The solution has also given Honeywell China the scalability of structure required for easy inclusion of new participants into the pool.”

Implementation was completed two months after SAFE (State Administration of Foreign Exchange) approval was granted in August 2008 and the speed and success of implementation was helped by Honeywell treasury’s efforts to involve all stakeholders from the beginning. Buy-in of the business units was secured using a two-pronged approach.

Regular regional meetings were held with the local business units to ensure they understood their roles in the project. At the headquarters level, the CFOs of the various businesses were kept informed about the progress and results on the ground.

Since implementation, Honeywell China has seen such benefits as higher investment returns, reduction in bank fees, increased operational efficiencies and enhanced regulatory compliance.

As well as providing competitive interest rates (pegged against the USD LIBOR rate), the solution has also given Honeywell China the scalability of structure required for easy inclusion of new participants into the pool, in particular Honeywell China’s joint ventures (JVs).

“As such, the cash pool has a special feature that tracks the aggregated amount contributed by each participating JV and also limits the withdrawal amount of each participating JV to the total of contributions it has made. We have already included one JV into the cash pool and we certainly hope to include more in the future,” concludes Wu.