The challenge:

Before the solution was implemented, BASF’s 44 majority-owned subsidiaries in China did not have a centralised foreign currency liquidity management structure. Some entities relied on bank loans to fund working capital needs, while others sat on idle US dollars that had limited investment channels.

Since BASF’s liquidity in China was isolated from its global liquidity structure, it came with a few drawbacks including costly onshore external funding that is significantly higher than the offshore funding rates. As such, limited intercompany borrowings were conducted under China’s foreign-debt borrowing framework, which required case-by-case regulatory approvals and manual efforts. The inefficient process thus consumed significant time of BASF’s treasury department.

The solution:

The multinational was nominated by SAFE’s Head Office to participate in China’s Nationwide Pilot Programme for foreign currency cross-border pooling, POBO/COBO and netting. BASF was the first company in China with approval to pilot a comprehensive solution including:

• Domestic and cross-border USD cash pool to centralise foreign currency liquidity.

• Payment-on-behalf-of/collections-on-behalf-of (POBO/COBO).

• Netting for cross-border settlement with cross-bank foreign exchange (FX) conversion.

• Conversion of Chinese Yuan (CNY) to foreign currency (FCY). FCY payments can also be processed separately by different banks.

Supported by Citi through the pilot, the conglomerate has benefited from access to cheaper offshore funding and reduced its reliance on onshore bank loans for working capital needs. Under the pooling arrangement, BASF (China) Company Limited serves as the pool header for the automatic, end-of-day sweep involving 24 domestic entities in China and two overseas entities in Belgium and Germany.

The Adam Smith Awards are acknowledged as a global benchmark for excellence in the field of Corporate Treasury. We are honoured to have received an Adam Smith Award, and also thankful for the recognition from our peers and counterparts in this industry. This means a lot to me personally and our treasury team, because the award shows to the world that we’ve been doing a great job and adding value to our company.

When China is cash-rich, the sweep is made from China to BASF Head Office’s account located in New York. When China is short of cash, funds will first be swept from the non-resident account of BASF Belgium Coordination Centre (BASF’s finance hub in Europe) located in China. If that is insufficient, funds will then be swept from BASF SE’s account in New York to cover the funding shortage in China.

As Sharon Wang, Senior Manager, Treasury Asia Pacific explains, “Through the fully automated, cross-border cash pooling, BASF’s global cash mobility and visibility has been greatly enhanced.” Moreover, the issue of high onshore external funding costs is resolved since cash is no longer left idle in China, and the offshore centres are allowed to fund domestic working capital needs in a ‘just in time’ and automated manner. Substantial and tangible savings on funding costs and transaction costs, and efficiency gains were achieved as well.

Best practice and innovation:

The market-first solution is tailor-made to address BASF’s specific treasury management needs and has achieved an optimal cash management structure. Deploying cutting-edge technology on an automated online platform and system, the solution is capable of implementing complex projects. This solution also secured China’s regulatory approval quickly, which was not available to other companies at the time and has not only transformed BASF’s treasury management in China, but is expected to be emulated by other companies seeking similar benefits.