A careful approach to risk management

Past experiences have taught Xuelin Chen, Director of Group Treasury at Trip.com Group, the importance of being cautious and having a careful approach to managing risk. She describes the lessons she has learned through her career and how they have helped her manage the treasury team at Trip.com Group – particularly during the challenges brought on by the COVID-19 pandemic.

Steve Jobs, the legendary co-founder of Apple, once said: “You can’t connect the dots looking forward; you can only connect them looking backward. So you have to trust that the dots will somehow connect in your future.”

Something similar could be said of Xuelin Chen’s career in treasury. Earlier in her professional life certain situations may not have made sense at the time, but with hindsight it is possible to connect the dots and see how they have taught her important lessons. Now in her role as Director of Group Treasury at Trip.com Group, these lessons have stood her in good stead – particularly through the disruption that was brought on by the COVID-19 pandemic.

Chen graduated with a Master’s degree in banking and finance, and since then has always worked in treasury. Her experience, however, has been varied and broad, and she has worked for a number of different types of companies – including family-owned businesses and multinational corporations – and in different countries. “Sometimes when I look back at some jobs, it makes sense why I worked there, but some jobs it does not! There are certain decisions I made that I’m very thankful for and glad I made that choice – they have equipped me well for my current role,” Chen explains.

Along the way, Chen has watched and learned, and taken on some key lessons – especially when it comes to risk management. “Now I am in the position of leading a treasury department of 16 people I have to make big decisions and make proposals to senior management. These decisions can have a big impact on the company, and I have to be responsible for the consequences.” She takes this responsibility in her stride, however, because her work experience thus far has prepared her well. Throughout her career, she explains, “I worked hard and observed other managers and the mistakes they made, and also their leadership style.”

So how would she describe the style that she has adopted? Her guiding philosophy, or treasury management style, is one of caution when it comes to managing risk. This comes from witnessing the fallout when things are not going well. For example, she worked in one company where the cash position was so tight that on a daily basis she needs to decide which payments to release and which to be put on hold. She learned on the sharp end of how to manage when there is a squeeze of liquidity, but also the downside of how such tight situations can unravel. “I am very risk averse, and very humble vis a vis the unpredictability of events – and the importance of the process and the risk in financial markets, and what can happen,” she says.

Chen also had the opportunity to work with one of the best treasury teams in Switzerland, which had sophisticated foreign exchange (FX) hedging programmes. Here she gained an appreciation for the disruption and unexpected losses that can occur if the market turns. “After that experience, I realised that in terms of FX management, or risk management, there is only so much you can do with financial derivatives even with a sophisticated hedging strategy – these financial products only buy time. With every hedge, there is a cash cost and an opportunity cost – that is what I have learned,” Chen says.

She comments that she has also witnessed the ramifications of poor decisions by her seniors, which has also shaped her approach to risk today. In one experience – which she hopes never to see again – she saw how an investment in a financial instrument that was backed by student loans defaulted and made a huge loss for the company she was working for. “This has led to my style of being very careful,” she explains. “If there is a financial product I do not understand, or I have little visibility of, I would rather not take the risk,” Chen says.

What is the best way to handle this kind of responsibility, where making a poor investment decision could ruin the company? Chen says it is crucial to approach the role with clear boundaries about what it entails and what the expectations are.

“You need to have a very clear agreement on the key performance indicators (KPIs) with the senior management and the chief financial officer,” Chen explains. “In the past there have been losses to a company because they have expected the treasurer to perform beyond what the market conditions are. Right now, with the billions of dollars in cash surplus, you cannot have that kind of return with no risks. You have to go with longer duration or invest in a riskier product – and then there is a risk for the company. It is such a large amount and I have to be careful and educate the senior management; we cannot get returns without trading for higher risk. They have to accept the treasurer can only do so much,” she says.

It is not just the financial instruments that can land a treasury department in hot water; risk can also lie in the commercial contracts the business has signed. Again, Chen has seen the downside of this and is now vigilant about the terms of business the company agrees to. In another company she worked for, she had to untangle the foreign exchange risk the company was exposed to because of the nature of the commercial deals that were signed. The business had agreed to a contract where the price of a key commodity was fixed by a reference rate that couldn’t be hedged – it wasn’t linked to a price obtainable in the market. Even worse since this rate is applied to a long period after the rate is fixed, the company was left with a potentially crippling exposure.

This experience also highlights the need for the treasury team to be involved in the negotiation of contracts, much in the same way the legal or tax department would be. “The role of the treasurer should be to get involved in what our business people are signing with our partners – the way they sell and the way they buy,” Chen says. One of the first things she did in her current role was to review the contracts the company had on the sourcing side – for example, with hotel groups and airlines – to ensure that any exposure could be managed. It is important, says Chen, to educate the business about such financial controls. One issue, she comments, is that the KPIs of salespeople can be very different from treasurers – they may be incentivised, with large bonuses, to sign the biggest deal possible, regardless of its long-term viability for the company. You cannot hedge a bad contract, Chen believes.

While Chen has had a varied experience throughout her career, her current role is challenging in new and different ways. She had been working in Europe and decided to return to China at the end of 2018 to begin her role for Trip.com. “I was so excited to work for the company because it is in the internet industry,” she says, explaining in the past her previous roles had been in traditional sectors, such as manufacturing or chemicals. Those businesses, she explains, typically move more slowly and had a mature business model, with a very stable market position.

If there is a financial product I do not understand, or I have little visibility of, I would rather not take the risk.

Things are very different at Trip.com, which is fast-moving. It is also a relatively young company with a young workforce. With approximately 30,000 employees, the average age, explains Chen, is 28. “I feel like I’m back at university – people are so young!” she says. She was also keen to work for this company because it has a female leader – Jane Sun, the CEO of Trip.com Group – and the leadership team is also female. “That is quite unique in the technology industry,” Chen says. On a personal level, she says, it is inspiring to be working for such a CEO. “You have someone to look up to – someone who is leading a US$4bn business. In Asia, I have seen this more; in Europe it is much rarer,” she says, of women being in prominent leadership positions.

Also, the pace of business is very different to what she experienced in Europe. In a traditional company, for example, it could take 12 months or so for a new product to get to market. “At Trip.com we could have new products or new services on a weekly basis,” she says. “With an internet company, it is so fast – it is completely different from my previous job,” says Chen. And all these new products have the same treasury needs as a slow-moving product in a traditional company.

The demands of this fast-paced environment were perhaps nothing compared to the response that was needed as the COVID-19 pandemic unfolded. Chen had to steer the group’s treasury through the disruption, which was particularly challenging as the travel industry was one of the most severely impacted. Although it was challenging – and difficult at times – this experience has been a highlight of her career, providing her with more lessons for the future.

China experienced the outbreak of COVID-19 much earlier and locked down at the end of January 2020. Then a few months later in March, the global equity and bond markets crashed, causing a liquidity squeeze for many companies. “That was the most disruptive moment for the company,” says Chen. Trip.com was founded in 1999 so it had experienced something similar with the SARS outbreak in 2003. Unlike SARS, Covid was going to last longer than six months, however. Also, SARS was not global, and COVID-19 has had a much wider, global, impact. At the time COVID-19 started to spread, the company had an ongoing refinancing project, which at the outset Chen had expected to be a smooth process. However, because of COVID-19, it was disrupted and became very difficult and eventually took nine months to be completed.

Through this, however, Chen was able to pull off what she needed to for the company and was able to secure a US$1.3bn syndicated bank loan, and also a bond issuance. The market was very tight, Chen explains, and this had to be done in stages. Chen explains it was also difficult to manage the company’s relationships with its banks and convince them that the company was solid and could withstand these unprecedented events.

Perhaps the biggest issue that Chen had to deal with was the sheer number of cancellations because of the ban on travel. “There were two million cancellations that had to be reimbursed,” she says. This was an unexpected level of refunds, and also, there was a massive issue because of the delay in when the company receives the money back from its suppliers compared to the expectation of when the customers expect their refund. They have to refund the customers immediately whereas the airline, for example, which issued the ticket is still holding their money. “So, with a single event like this – if you have two million customers at the same time wanting a refund – it is a shock to the cash flow of the company,” says Chen.

This obviously was a concern to the company’s lenders at the time. “We were very transparent with the lenders and were able to show them the cash flow forecast and that we would be able to survive in the worst-case scenario – the company would still have no liquidity issue if they paid in their share and did the refinancing. Being so open with them was the right thing to do,” says Chen.

Amid the crisis, however, were opportunities for Trip.com. In 2003, when the SARS outbreak occurred, the company was able to gain market share and the same occurred this time around. “The travel demand is still there – it is delayed and has transformed to domestic travel,” says Chen. Also, competitors, particularly offline travel agencies or smaller firms, were not able to handle the cash flow shock and they have thus disappeared from the market. “For us it was an opportunity to consolidate our market position and share,” says Chen.

During the most recent crisis, Chen says that it has been important to get the support from the highest level of an organisation – particularly their banking partners – and to know when to go straight to the top. When dealing with the financial arrangements, because of the urgency of the situation, it was critical to go to the senior leaders rather than deal with the credit officer in a particular country. Chen explains how she was able to reach out to the chief risk officer of the bank immediately as she knew they would have a different view on the risk of the company in this extraordinary time. Also, Chen explains, because of the company’s good relationships – and the bank understanding the nature and solid footing of the company – they were able to secure US$1.8bn in financing at much better pricing than their competitors. Throughout the pandemic, liquidity was top of mind: “Cash was king – that was an absolute priority,” says Chen.

With these experiences behind her, Chen now has the breathing room to look ahead to the future. One of the priorities is to focus on technology, she says. For many years there weren’t many changes at the incumbent banks, with treasury management systems and SWIFT operating in the same way. But now, particularly over the last two years, there has been a lot of change, such as the use of APIs [application programming interfaces] in bank connectivity and FX trading, which were already implemented in Trip.com. Chen says she is particularly keen to make use of robotic process automation (RPA) and intends to implement this for the treasury’s operational work.

As Chen prepares for the next stage of her career, with all the new technology it entails, it is difficult – like Steve Jobs said – to connect the dots looking forward. No doubt her future endeavours will provide more life lessons and the dots will connect in the future as well.