Cash & Liquidity Management

Trapped cash

Published: Mar 2013
Camille Wenying Liao
Camille Wenying Liao, Director, EMEA Liquidity and Investment, Citi Transaction Services (CTS):

In many cases, cash can become trapped due to tax implications, restrictions on inter-company lending and limitations in foreign currency convertibility and transfers, creating a challenge for companies looking to optimise global liquidity.

Freeing trapped cash across an organisation requires a multi-faceted approach to ensure visibility, control and optimisation, as well as maintaining optimal account/banking structure within the confines of the tax and regulatory environment.

When companies make trapped cash more accessible and usable, hence increasing its value, they are able to pursue the following opportunities:

  • Strategic:

    Stretch trade payables and shorten the trade receivables terms and/or with re-invoicing centres to mitigate trapped liquidity issues.

  • Local investment/acquisition:

    Establish business units in markets with high levels of trapped liquidity.

  • Optimisation:

    Balances in some restricted jurisdictions can be used to offset borrowing elsewhere – interest enhancement/optimisation products.

  • Local yield enhancement:

    Relevant investment instruments and liquidity management tools include domestic pooling structures, local commercial paper, treasury bills, call deposits, domestic money market funds (MMFs), time deposits and local stock exchange, among others.

With reference to the specific situation in China, there are currency control policies: all cross-border transactions in the country require supporting documentations. Chinese currency is only used domestically before renminbi (RMB) internationalisation. Traditional ways to mobilise onshore cash include:

  1. Dividend payment: a company in China can repatriate dividends to its holding company once or twice a year.
  2. Re-invoicing centre, leading and lagging techniques by leveraging trade flows to minimise surplus cash onshore.
  3. Local optimisations via domestic RMB and foreign currency inter-company lending and cash pooling among subsidiaries onshore.

Recent RMB internationalisation and steps taken by China’s government in liberalising capital flow open a window for MNCs to achieve further treasury efficiency.

  1. RMB cross-border inter-company lending (one-off loans): domestic companies can lend excess cash to overseas group/sister companies, subject to the People’s Bank of China (PBoC) approval.
  2. Cross-border cash pooling: multinational company (MNC) groups are allowed to establish ‘cross-border cash pooling’ structures to link domestic cash pools with overseas cash pools, subject to approvals by the State Administration of Foreign Exchange (SAFE) (for foreign currency) or by PBoC (for RMB).
  3. Offshore financing which leverages financial guarantee: a domestic entity can pledge surplus cash with a bank in China who will issue a standby letter of credit (SBLC) guarantee to an overseas bank and that bank will extend a credit facility supported by a SBLC. A SBLC in foreign currency is subject to a quota approved by SAFE, whereas a SBLC in CNY is no longer restricted by a quota.

As most of the recent policies are still under piloting stage, corporates intending to establish cross-border liquidity structures need to work with a partner bank to prepare a joint application for regulatory approvals. Citi is a trusted advisor which maintains close dialogues with Chinese regulators to structure the most efficient solution to help clients to improve efficiency in liquidity management.

Qilong Zhao
Qilong Zhao, Implementation Manager, SunGard’s AvantGard, China:

China’s strict rules on tax, registered capital and foreign exchange (FX) are the main reasons for trapped cash among MNCs. Currently, we do have a number of options to release the trapped cash such as dividend and cross-border lending. But in the current market climate, the temptation is to keep cash inside China because higher yield can be earned in China than in other markets.

In recent years, the Chinese government has been taking steps to loosen regulations and internationalise RMB, such as lifting restrictions on RMB settlement for overseas countries and allowing the opening of offshore bank accounts and inter-bank transfers of RMB in Hong Kong. We have enough reasons to expect that these things will become much better in the future.

John Mardle
John Mardle, Managing Director, Cash Perform:

As China’s economy has grown rapidly over the past ten years or so the corporate sector has actually left the small business market in China behind. Why? Because the focus has been on expansion abroad and delivering world class products (not services) to consumers throughout the world. However, now is the time for China to develop its service sector and commence the long haul of enabling its smaller and medium businesses to deliver efficiencies within its own internal supply chain. This will then generate service offerings that will deliver real cash flow enhancements throughout the Chinese economy.

Let’s take the auto sector as an example. Chinese manufacturers have successfully integrated themselves within the western auto sector by producing high quality, low cost, high volume cars and vans. However, the area around design, marketing and the selling of vehicles has not been developed. These areas have therefore not been integrated back into the Chinese economy.

This means that when one reviews the whole financial supply chain, cash is being lost in some lucrative areas and is not finding its way back into the Chinese economy. The key is to establish suppliers in the Chinese economy who require working capital to fund technology, design and establishment of marketing and selling dealerships/franchises who can then market Chinese products to the working and middle classes of China and therefore stimulate internal demand for cash.

The next question

“How can corporates in Asia mitigate trade finance risk?”

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